What Do These Real Estate Terms Mean: HUD Home, Short-Sale, REO?
Real Estate is very complex and requires continuous education to keep up. Clients ask me for
help with properties they’ve seen that are HUD HOMES, SHORT-SALE, FORECLOSURE,
and other statuses, but have no idea what these terms mean. All of these can be good buys and provide
opportunity to improve a property to either live in (owner occupy), income
generating (rental), or for profit (flip).
Here’s a quick review of each and the potential pros & cons.
HUD HOME/FANNIE MAE: these are properties where
the previous owner had a government-insured loan (FHA, VA) and was foreclosed on. HUD, or Federal Housing and Urban Development,
pays the defaulted loan off, and then puts the home on the market. Typically, these homes can be purchased below
the market value.
- Pros/Cons: although these can be purchased below market value, many times you are buying the home “as is” so be very careful to have a professional and qualified inspector review the entire property so you know what you are getting into. I had a Buyer of a HUD home and the electrical furnace, water heater, and A/C were all shot. HUD would not fix them, and they typically will not make any repairs. On the other end of the spectrum, I’m currently working with Buyers of a Fannie Mae home where Fannie Mae put a lot of money into the home to improve, and the Buyers will only have a few minor repairs to make and move into a great home.
SHORT-SALE: A short sale is where the net
proceeds from selling the property will be less than the debts secured by liens
against the property. In this case, if
all lien holders agree to accept less than the amount owed on the debt, a sale
of the property can be accomplished.
Many times, the lien holder will be a bank or lender, and although the
Seller of the property may accept your offer, the bank/lender may not,
resulting in no sale.
- Pros/Cons: you will be able to pick up the property below market value, but typically it will not be in great shape nor move-in ready. The Seller is usually living there and may be taking good care of it or more likely, not. It may also be months before the bank/lender decides to accept your offer and close. I’ve seen these go through in weeks, and I’ve seen some hang in limbo for 6-9 months or longer. If you have time to wait, my suggestion is to make the offer and see what happens…you may end up with a property you can improve and move into or one you can flip for a nice profit.
FORECLOSURE: Like a short sale, this is a
property where the lender will be making the decisions as the owner has fallen
behind on their payments. The owner who is about to lose their home may be living
there, so the state of the house is certainly questionable. There likely are not going to be funds available
for the Seller to make any repairs that you find are needed, so you should go
into this with the assumption of buying it “as is.”
- Pros/Cons: below market value purchase that will not be move-in ready (for many) or require investment to flip. The Seller may be living there and may be taking good care of it or more likely, not.
REAL ESTATE OWNED, or “REO”: REO is a term
used to describe a class of property owned by a lender—typically a bank,
government agency, or government loan insurer—after an unsuccessful sale at a
foreclosure auction.
- Pros/Cons: these are below market value but not move-in ready. They will require investment to bring to an occupy-able state, or to turn into a rental property or flip.
BOTTOM LINE: there are properties in the market that you can
buy below market value, with great potential to improve and occupy, or improve
and either use as a rental property or flip for profit. You need to work with a professional who
understands the situation to guide you through in most cases, and not doing
this will result in you losing thousands of dollars. If you have any questions, or have properties
you’d like to know more about, reach out to Steve Silbar at 509-808-4988 (phone/text).
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