Home Status - Condition Sold As
When purchasing a home, it is important to know what the condition of the home is being sold as, and we are not referring to the physical condition. Homes are sold either as New, Resale, Short Sale, Foreclosure, or Bank Owned / Real Estate Owned (REO). Below are the differences of each sale condition.
The 5 Types
- New Home
A newly built property that has never been lived in. Many newly built homes are often secured by a home buyer during the pre-construction phase with a small deposit to purchase the home at a certain price once the home is built (typically 6-12 months). A newly built house or condo can be very appealing since they are brand new and equipped with modern conveniences such as efficient heating and cooling systems, but there are also a few drawbacks to consider. Newly built condos and houses usually cost more to purchase and use lower quality materials, whereas older homes often have solid doors, thick beams and walls. It is not rare for cracks to appear along the walls or ceilings in newly built homes after a couple years as the home settles, similar to a shoe having wrinkles after being worn in.
When purchasing a pre-construction home, it is best to negotiate a deposit of as little as possible to avoid a huge potential loss. While some people have made huge profits during 2000 - 2005 by securing a home during the pre-construction phase then selling them for more once the home was completed or near completion, it can also be very risky. I know someone in California who wanted to get into real estate investing and paid a deposit of $100,000 (20%) on a $500,000 pre-construction luxury condo in Las Vegas. As the condo was near completion in 2008, the real estate market in Las Vegas continued to decline rapidly and the value of the condo went down as well. After discussing the situation with me, he decided to take a $100,000 loss, rather than go through with the purchase which would have resulted in an annual cost of $50,000 while the value of the condo continues to decline. Renting the condo out would not even cover half the monthly expenses, which meant losing over $25,000 a year if the condo was rented out. - Resale Home
A home that has been lived in, even if the owner occupied the property for only 1 month and is in perfect condition. Similar to a car as it is no longer new once an owner drives it off the lot. A resale home is usually more affordable than a brand new home and older resale homes (i.e. over 50 years) also have design features that are not used in most of today's new houses because of today's trends and higher costs. Older homes have also settled, so if there are no cracks in the walls or ceilings, chances are there will not be cracks arising in the near future. However, older homes would also have older windows, electrical systems, heating and cooling systems and may be near their end of life. This is where a home inspection is critical because it is an absolute must to understand what additional costs may be incurred in the near future. It is not uncommon to spend up to $10,000 to replace an oil furnace to a gas heating system after factoring in permit fees, cost of equipment and labor.
- Short Sale
Pre-foreclosure stage where the home buyer has missed payments and received notices from the lender. Rather than proceeding with the foreclosure stage where the home buyer's credit will be damaged and the lender has to go through the trouble of filing to foreclose on the home, the lender agrees to take a loss by allowing the property to be sold for less than what the home buyer owes on his or her mortgage. This is an excellent way to purchase property significantly below market value, although the process is a little more complicated and sometimes can take months to complete depending on the existing lender or lenders if there are multiple mortgages on the property. Having a real estate agent on your team who is familiar with short sales will be extremely helpful as they should know the process and help you put together a strong package for the lender to consider. A short sale can often be a win-win situation for all parties involved. This can happen as the home buyer purchases the property at a significant discount, the current homeowner will not go into foreclosure in which their credit gets ruined, the lender does not have to go through the trouble of doing a foreclosure and can then take the property out of their portfolio to inject the funds received into their reserves, which is critical in this market for banks to have enough cash reserves.
- Foreclosure
Lender will take possession of the property (foreclose) once several payments have been missed (generally 3 - 6 months) by the owner, the home is not under agreement to be sold off to another party (either through a normal sale or as a short sale) and the lender has completed all the administrative foreclosure tasks. The lender will go to court or have their assigned representative sell the property either on the courthouse steps or outside the property itself with an auction (also known as a sheriff's sale).
Buying at foreclosure auctions can be risky and difficult because most states require bidders to pay the full amount with cash or cashier's check or a fee of say $5,000 immediately and obtain financing quickly (i.e. within 30 days) and without any inspection contingencies. It will be the new owner's responsibility to have the occupants of the home move out. Not only is it very risky to bid on a property as-is and without a home inspection, but there may also be liens on the property in which the buyer will be responsible for. In addition, some states have redemption rights in which the original homeowner has a certain amount of time (in some cases, up to a year) to pay off any due balances and reclaim the property. If there is an IRS income tax lien against the property, the IRS has up to 120 days to redeem the property after the foreclosure sale, where the IRS only needs to pay the winning bid amount plus interest and expenses/fees. Imagine what it would feel like to bid and win on a foreclosed property, spend $50,000 in renovations over 2 - 3 months, then the original homeowner or IRS takes back the home with their redemption rights? Sorry buddy, you just lost $50,000! - Bank Owned / REO (Real Estate Owned)
Property becomes bank-owned / real estate owned (REO) if the lender is the successful bidder (a lender usually has their own representative bid on a property unless other people bid at a price acceptable for the lender to take) at the foreclosure sale. In a declining real estate market, an REO property can be a great way to purchase a home at a significant discount as lenders do not want to hold on to empty homes which only ties up their cash reserves. Empty homes often end up getting damaged or used by troublemakers, which causes more problems for the lender because now the property is not marketable unless repairs are done, which the lender is not in the business of doing. It is usually not a problem for prospective buyers to view the property or do a home inspection since the property should be vacant and the lender's selling agent should be happy to have serious buyers who would spend the time and money to do a home inspection.
