3 Things You May Not Know About Distressed Properties
Updated: Jun 15, 2020
So, what are distressed properties? Your immediate thought may be something to do with the condition of the home - abandoned and halfway falling apart. In actuality, "distressed" describes properties that are available for sale because of financial hardship on the part of the current or previous owner.
Short Sale vs. REO
A Short Sale occurs when a homeowner sells their home AND the proceeds of the sale are not sufficient to pay off the mortgage liens, AND the seller does not have the funds to bring to closing. A successful short sale transaction includes ALL of the lien holders accepting less than what is owed to them.
Real Estate Owned, or REO for short, describes property that the bank comes to own because the borrower defaulted or could not financially afford to remain in the property. Efforts to sell the property, either at the short sale stage or at the foreclosure sale, were unsuccessful.
Regardless of the situation buying or selling a distressed property is highly complex. There are many factors that are made even more complicated by the type of loan product that was used for the mortgage. There is no “one-size fits all” solution. Every single distressed home sale has its own set of unique considerations.
Reinstatement Period vs. Redemption Period
There is still opportunity for the homeowner to reclaim their interest even after the home is considered in a distressed status.
This is a specific period of time (that can vary by state) where the owner can make all their outstanding payments along with any late fees or expenses incurred by the servicer, bring their account current, and no longer be in default. These specifics would be outlined in the Notice of Default.
This is a time (that varies widely from state to state and is defined differently from state to state) AFTER the foreclosure sale that allows the owner the ability to redeem the property as long as they pay the sales price, interest and other costs.
It is important to understand that some states allow no redemption period while in other states redemption may only be allowed if the property is taken by the bank but not if it is purchased by another party.
Non-Judicial vs. Judicial
The time it takes to complete foreclosure proceedings on a property is dependent on the method used to secure the loan on the property. These are typically:
Deed of Trust/Trust Deed, where the legal title of the property is held by a trustee who holds it as security for the loan until the loan is paid. If the borrower defaults, then the title is already in the hands of the trustee which makes the foreclosure process much simpler and quicker. The borrower pre-authorizes the sale of the home in the loan document which is why this is considered a Non-Judicial foreclosure.
Mortgage & Mortgage Note is the other method to secure the loan for the property. In these situations, the legal title is held with the owner. The mortgage is the loan to finance the purchase of the real estate. The real estate is used as the collateral and it is the mortgage that puts the lien on the property. The mortgage note makes the borrower personally responsible and outlines the terms of repayment. If the borrower does not pay as agreed, then the lender/investor may seize the real estate by initiating foreclosure proceedings through a court order. This is considered a Judicial foreclosure.
Most property in Delaware is purchased with a Mortgage (and mortgage note). If a borrower experiences financial hardship, the foreclosure proceedings could take as long as 200+ days. In any case, foreclosure is a loose- loose scenario. Owners are displaced and suffer negative financial impact, and lenders/investors are left trying to minimize their losses.
As your trusted Realtor, I understand the important role that home ownership has in strengthening families and communities. My advice to everyone who is facing financial hardship and concerned about losing their home is to work with their lender and find a new arrangement. Lenders may provide options such as loan modification, forbearance and deferred payments that may give you the chance to stay in your home.