Sellers Market, Buyers Market or ..............Lenders Market?

Buyers rule? Not so fast. Certainly that's not quite true if the property falls under the category of distressed property.

Distressed property usually needs far more than paint job, at least, that's true, or has been up to now. Property is considered distressed if it has been foreclosed by the lender or the owner is seriously late in making payments or the property is upside down. Upside down meaning that the value of the property is less than the mortgage amount.


So what am I meaning by Lender's market? To define a "Lenders Market", let's first review the characteristics of a “Seller’s Market” and a "Buyers Market".

In defining a "Sellers Market", we usually find a lower than usual and faster moving inventory with prices generally increasing and the Seller more clearly in control to determine the outcome of any successful effort to purchase. Buyer's tend to pay more (often times more than property might be listed for). Many of the buyers contingencies are either eliminated or greatly reduced. The time for removal of contingencies is shortened. In some cases many of contingencies are negotiated way, such as a buyers typical request for repairs and the length of time the buyer has to obtain services such as appraisal and loan approval.

In a really hot “Seller’s Market”, buyers typically need more down payment and higher earnest money deposits that may be defaulted if the Buyer fails to consummate the transaction in the exact time frame as outlined in the purchase agreement.

In a “Buyer’s Market”, buyers tend to have greater control of the time frames and also many of the terms and conditions in the contract tend to favor their wants. Sort of a flip of what is found in the “Seller’s Markets”. In a “Buyer’s Market”, buyers typically pay less than they might in an active “Seller’s Market” and usually have a larger selection of properties to choose from.

So what then is a “Lender’s Market”? A “Lenders Market” is typically where there is a large number of or a majority of the market is made up of distressed property sales. Distressed properties being those where the owner is either in default of keeping the mortgage current or has already been foreclosed upon. A property is also said to be distressed if the value of the property is less than the mortgage or trust deed amount and the owners are unable to keep the mortgage current and want to sell the property. When a property has been foreclosed by a lender, it is called Real Estate Owned (REO). When a property owner wants to sell a property for less than is owed on the property, it is referred to as a Short Sale.

A lender's market might have a combination of many of these characteristics. Many of the buyers benefits in their offer to purchase are striped away including the pest inspection and clearance, closing costs, home warranties and repair requests with the lender opting to sell the property is present physical condition. Naturally there are exceptions to this depending on the Lender and whether the distressed property is a short sale or REO. By and large, lenders want the highest possible price with the least number of contingencies. Only Buyer’s with pre-approved loans are considered and in the case of REO’s, the lenders will give greater priority to All Cash offers over offers with financing even if the offering amount is slightly less. All Cash offers have fewer contingencies and can usually close faster clearing the asset from the lender’s books faster without any hassles or delays as may be occasioned by other banks that are providing the Buyer’s loan.

When properties are “Sold in present condition”, Buyers must be extra diligent in their property inspection to ascertain to the extent possible, the true nature of the property.

Typically lenders will tighten down time lines and may impose a penalty if there is any delay in the close of escrow for any reason. The essence of the lenders market is "take it or leave it" As the saying goes, "He who has the gold makes the rules". But it is also important to know that many REO’s and short can be good deals but it does require extra diligence and careful consideration when purchasing them.

To further describe the difference in distressed properties, in a Short Sale the owner of the property remains the Seller and in the REO, the lender is the new owner and the differences between a short sale and REO can be striking.

In the short sale, the lenders key role is to approve taking a loss in the amount owed on the trust deed or the mortgage. When the mortgage is late usually for 3 consecutive pay periods, the lender can file a notice of default. In a short sale, if the owner files documents with the lender explaining the financial distress that is causing the late payment and wants to sell the property, the lender may opt to consider a purchase offer on the property that is short of what is owned combined with the costs of sale. It is a judgment call of the lender since they have the right to file a default notice and if the owner can not correct the default amount, the lender can foreclose. The lender has specific times frames it must follow in this regard. The Buyer as well has a specific amount of time to cure the defaulted payments with any penalties.

Lenders have been encouraged by the government to for stall the foreclosure process and help slow down the excessive number of foreclosures that have taken place over the last couple years on the defaulting loans.

Lenders involved in distressed properties are clearly in charge to determine if they will accept even the highest offer on the property. In the case of short sales, they can either accept writing off the short fall of the outstanding trust deed or opt to continue the foreclosure process. Of late, lenders are becoming much more realistic in understanding that short sales are costing them less than they would have to write off as a bad asset in a foreclosure.

REO's close in the shortest possible time period of property sold in California. In short sales, there is most often a serious lag time (often months) before the lender even agrees to the process. Today with the greater influence of government encouraging banks to accept the short sale process sooner rather than later, we will most likely see the short sales process refined and the time frames for approval to be lessened.

Distressed property sales in the area make up close to 50% of the entire real estate market in reported sales. The good news is that equity sales are increasing and perhaps by spring of 2010, the equity sale will once again be a far greater share of the market.