Buyers want bargains. Some even limit their search to REOs and short-sale listings.

REO, or real estate-owned, refers to a property that a mortgage lender acquired through a foreclosure. It’s owned by the bank. A short sale refers to a situation where the sellers still own the property but they can’t sell for enough to pay off the mortgage(s) and costs of sale.

There are pros and cons to buying distressed sale properties. They often sell below market price. However with REOs, there is usually very little information about the property and no seller disclosures.

Banks that hold REO properties usually have an infrastructure in place to deal with these transactions. Lenders are motivated to get REOs off their books so they can put the money to better use.

But, there’s no emotion involved. What’s important to the lender is the bottom line. So be prepared to negotiate. Save a concession or two to add to your offer, like a higher price or a quicker close.

Unless the listing agent convinces the bank to do fix-up before selling, the property could need work. If so, it won’t appeal to as many buyers and could be a good opportunity for buyers with vision.

Short-sale properties also tend to have a lot of deferred maintenance. If the sellers are having trouble making the mortgage payment, there may be no funds for fix-up.

A big frustration for buyers and agents working short-sale transactions is that many lenders don’t have systems in place to deal with them. This situation is improving as more short sales move through the pipeline.

Some lenders are easier to deal with than others. Lenders who hold mortgages in their own portfolio are usually quicker to make a decision. Lenders who sold their loans may need investor approval before accepting an offer.

HOUSE HUNTING TIP: Buying a listing that’s subject to lender approval requires patience on the part of the buyers, sellers and their agents. It can take three to four months to get an answer. There’s no guarantee that a short-sale offer will be approved, and it’s not uncommon for lenders to reject a purchase offer without giving a reason why.

Most lenders won’t even consider taking less than they’re owed until there is a signed purchase agreement and the buyer’s deposit has been placed in an escrow or trust account. The lender needs a settlement sheet prepared by the closing agent before they’ll consider the package. Bank approval usually depends on the net price, the buyers’ ability to pay under the terms of the contract and a bank ordered appraisal of the property.

Short-sale properties that have more than one loan secured against them can be problematic. They require approval from more than one lender. In some cases, the market value is so low that the sale won’t generate enough money to pay off the first loan and nothing at all to pay to the second mortgage holder.

Sometimes lenders will grant conditional approval. For example, approval might be conditioned on the seller converting an amount owed to the lender(s) to an unsecured loan that would be paid off over time. If the seller won’t agree, the transaction fails.

An offer to buy a short-sale property should include a provision that allows the buyers to withdraw from the contract without penalty if the seller is unable to verify lender approval by a certain date. Be aware that until a deal is approved, the lender will review other offers that might be made.

THE CLOSING: One benefit of a short sale over an REO listing is that the buyers may be able to obtain more information about the property, particularly if the sellers are still living there.

Dear Ginny: A friend of mine advised me not to invest in real estate. He thinks real estate prices will be depressed for many, many years. The stock market scares me and I don’t understand it. In the past, I’ve bought and sold several houses and know how to fix them up. Is investing in real estate a good thing?

Stephen, I mean no disrespect to your friend, but I wouldn’t place much value on his opinion unless he’s been involved in and has expertise with the real estate market and economy in general. The other problem that I have with his opinion is that he is forecasting what he believes will happen with real estate prices many years into the future.

I say that real estate investing is worthwhile, especially for an experienced property buyer like yourself, but not for all investors. Inexperienced real estate investors often are not aware of all the time and energy required to buy, improve and manage property. Of course, just because someone hasn’t bought an investment property before doesn’t mean that they aren’t up to the task. Everyone has to start with a first investment purchase.

Real estate has produced comparable long-term returns to the stock market. Of course, as recent events have demonstrated, both can lead to significant losses in the short term! Real estate and stocks don’t always move in tandem, so investing in real estate may help diversify a stock portfolio and vice versa. Consider that when the stock market tanked in the early 2000s, for example, real estate continued to do well in most parts of the country.

Real estate should continue to produce solid returns for the long term. Why? For many reasons including the following:

First is limited land. The supply of land here on Earth is fixed, thanks in part to water covering about 70 percent of our globe. And because people are prone to reproduce, demand for land and housing continues to grow. Consider that the population of the United States was just 100 million in 1915, 200 million in 1968, 300 million in 2007, and is expected to approach 400 million by middle of this century.

Real estate is different from most other investments in that you can generally borrow up to 80 percent of the value of the property. Thus, your relatively small investment can be used to purchase, own and control a much larger investment. Of course, you hope that the value of your real estate goes up; if it does, you make money on your investment as well as on all the money that you borrowed.

Here’s a quick example to illustrate. Suppose you purchase a property for $200,000 and make a $40,000 down payment. Over the next three years, suppose that the property appreciates to $240,000. Thus, you’ve made a profit of $40,000 on an investment of just $40,000. In other words, you’ve made a 100 percent return on your investment. (Note that this scenario is a simplified example because you have expenses from the property that may exceed the rental income you collect. If the property’s income just covers the expenses, then your return is 100 percent.)

Leverage is good for you if property prices appreciate, but leverage can work against you as investors who bought in recent years have experienced. If your $200,000 property decreases in value to $160,000, even though it’s dropped only 20 percent in value, you actually lose 100 percent of your original $40,000 investment. If you have an outstanding mortgage on this property of $160,000 and need or want to sell, you’d have to pay money into the sale to cover selling costs, in addition to losing your entire original investment.

Another reason real estate is a popular investment is that you can make money in two major ways from it. First, you hope and expect over the years that your real estate investments appreciate in value. The appreciation of your properties compounds tax-deferred during your years of ownership. You don’t pay tax on this profit until you sell your property — even then you can roll over your gain (through a 1031 exchange) into another investment property and avoid paying tax.

In addition to making money from your properties increasing in value, you can also make money from the annual cash flow. You rent out investment property to make a profit based on the property’s rental income exceeding your expenses (mortgage, property taxes, insurance, maintenance, and so on).

In the early years of rental property ownership, your monthly operating profit may be small or nonexistent, although the increasingly good buys in many housing markets are changing this. Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than your expenses. During soft periods in the local economy, however, rents may rise slower than your expenses (or the rents may even fall).

Unlike investing in the stock market, you may have some good ideas about how to improve a property and make it more valuable. Perhaps you can fix up a property or develop it further and raise the rental income accordingly. Perhaps through legwork, persistence, and good negotiating skills, you’re able to purchase a property below its fair market value.

Relative to investing in the stock market, it is easier for persistent and savvy real estate investors to buy property below its fair market value. You can do the same in the stock market, but the scores of professional, full-time money managers analyzing stocks make it harder to find bargains.

You’re paying your bills, but your landlord isn’t. And you’re the one holding the eviction notice.

This is becoming an all-too-familiar scenario for thousands of renters nationwide who have become the unintended victims of foreclosures. Banks are booting good tenants onto the streets with little to no notice after seizing a property from a delinquent owner, ignoring tenant leases.

In the most troubling cases, families are forced into shelters for temporary housing because they have little savings to cover moving costs, first month’s rent and a security deposit at another apartment.

Fannie Mae’s new policy can keep tenants in their homes or give them money to relocate.

Fannie Mae has pledged to change that with its new renter policy starting this month. The plan will allow renters living in foreclosed properties to sign new leases with Fannie while the property is up for sale, or give the tenants money to move. Fannie has yet to establish the length of the leases, and the amount of move-out assistance will vary by state and property.

Freddie Mac said it would unveil a similar program in a few weeks.

But how does a renter know if his landlord has a mortgage held by Fannie Mae or Freddie Mac? Worse yet, what about renters of landlords who don’t?

Fannie Mae plans to reach out to tenants, spokesman Brian Faith said.

“Most tenants don’t normally know the details of their landlord’s mortgage arrangements, but we’ll be contacting the tenants in foreclosed properties we own to make them aware of the option to stay in their home through a lease with Fannie Mae,” he said.

The details of Freddie Mac’s tenant plan are still unavailable.

The pair own or guarantee about half of the $11.5 trillion in U.S. outstanding home loan debt. Fannie estimates about 4,000 tenants live in the company’s foreclosed properties and would be eligible for the plan.

Unfortunately, that’s just a fraction of renters facing the consequences of a landlord’s foreclosure. Renters in large complexes are probably safe because multifamily loan delinquencies are still very low. But 15 million renters, or about 40% of all renters, live in single-family homes, many of which are owned by mom-and-pop investor landlords. This is where the risk lies.

What should you do if you receive a foreclosure or eviction notice?

“Don’t panic or stick your head in the sand. Neither action will be helpful,” said Robert Baker, education coordinator at Housing and Credit Counseling Inc. in Kansas.

Call the sheriff’s department first, Baker said. Find out how long the foreclosure process takes. Is it 60 days or 90 days? Then you will have a timeline to work with and time to prepare for the worst-case scenario.

Next, get on the Internet. Find out the rental laws in your state. Some states, including California and Illinois, have recently passed legislation giving renters a grace period, ranging from 30 days and up, to stay in a property after it has been sold in foreclosure. Other states are considering similar legislation.

The U.S. Department of Housing and Urban Development outlines tenant rights by state on its website at www.hud.gov.

The lender’s name or its lawyer will be on the eviction notice. Contact either one to let them know you are in the property. Find out what your options are. Will the lender let you sign a new lease? Or is the bank offering some cash assistance for moving out? Don’t let the lender bully you into moving out sooner than stated by law.

If you are nervous about negotiating with the lender on your own, contact a local nonprofit housing counseling agency for help. HUD’s website lists agencies by state, or you can call (800) 569-4287.

You also can do a little digging into your landlord’s financial situation if you are worried about a possible foreclosure. Go to the county courthouse or its website and do a rudimentary background check on your landlord.

District court records or the county recorder’s office will show if any foreclosure actions or judgments have been filed against your landlord. Are there any other records showing financial distress, such as past or present bankruptcy filings? These can be telltale signs of a landlord strapped for cash, Baker said.

Also, call your local Better Business Bureau to see if there have been any complaints against your landlord. This can be a clue that something isn’t right.

Last, has the condition of your rental property suddenly deteriorated because of neglect? If the landlord isn’t making repairs, maybe it is because he can’t pay for them or doesn’t want to spend money on a property he is about to lose.

In the meantime, save some money in a rainy-day, forced-out-of-my-home fund.

Many homeowners who have watched interest rates plunge over the last month or so have undoubtedly felt pangs of mortgage envy. It’s a perfectly natural emotion when lenders start to dangle 4.9 percent rates for 30-year, fixed-rate loans without extra fees for buying down that rate.

These offers, which were common in recent weeks, started the phones ringing at the offices of mortgage brokers. But for many homeowners, deciding whether to refinance their mortgages can be confusing, especially if they have had the loan long enough to start significantly diminishing their debt.

Because the typical mortgage only lasts for about five or six years before the homeowner sells the home or refinances the loan, lenders collect much of the mortgage interest during those years. Once a loan gets beyond five or six years old, homeowners can start seeing the overall debt drop at a faster pace.

So if a homeowner has reached that point, does it make sense to start a new 30-year loan, and face another five years where you’ll make heavier interest payments? The answer, as is so often the case with financial decisions, depends on individual circumstances. If retirement or tuition payment plans involve the liquidation of a home, it may make sense not to take out a new loan.

But in other cases, the monthly savings from a cheaper mortgage could be critical — “especially in this economy,” said Richard E. Austin, a financial adviser with Lincoln Financial Advisors.

Mr. Austin, who is based in Rye Brook, N.Y., noted that someone who five years ago borrowed $220,000 on a 30-year, fixed-rate mortgage at 5.5 percent would have reduced the loan principal to only $203,500, despite having made nearly $75,000 in payments during that time. From this point forward, the principal would shrink more quickly, but if the borrower could reduce the interest rate to, say, 5 percent, the monthly mortgage payment would drop by $157, to $1,092. Assuming it costs $3,000 to close that new loan, it would take just 27 months to recoup the costs if the borrower is in the 28 percent tax bracket.

If a homeowner planned on keeping the new loan for 27 months or longer, a refinance could well make sense, Mr. Austin and other mortgage advisers said. The federal government has floated the idea of engineering a 4.5 percent mortgage rate, by promising to buy mortgages at those rates, but that proposal was only targeted at loans made for a home purchase, not a refinance. Mortgage rates in late December were at their lowest level since at least 1971, when Freddie Mac began tracking these loans.

Closing costs vary widely in the New York area. Borrowers in Manhattan, for instance, face much higher mortgage taxes than those in the suburbs, so the financial calculus of a refinance decision shifts accordingly.

Mr. Austin, who is also a tax lawyer, said another frequently overlooked factor could help reduce the cost of a refinancing. If the new bank agreed to essentially absorb the old loan — albeit with new terms — the homeowner might not face a mortgage origination tax on the new loan.
So when shopping for the new loan, he said, borrowers should ask if the lender will perform a “consolidation and assignment” with the old loan.
Be sure to ask, or the lender may not offer it.

For those averse to the idea of starting the 30-year clock anew, Mr. Austin suggests splitting the monthly payment — making half at the middle of the month and saving the other half for the actual due date. That strategy, he said, can take years off the new loan’s payoff term.

The financial crisis has torpedoed the retirement planning of many seniors. Those foolish enough to have followed the advice of investment advisors who preached that homeowners should convert all their home equity into investments, now find that their home equity is negative because of declining home prices. At the same time, the value of any common stock they purchased by mortgaging their houses up to the hilt is probably way down because of the sharp decline in stock prices.

We can’t undo the past, but we can make better decisions in the future. This is a guide on how to make decisions about mortgage repayment.

The Core Principle is That Repaying a Mortgage Is an Investment: The yield on mortgage repayment is the mortgage interest rate. Repaying a 6 percent mortgage yields 6 percent, the same return as acquiring a 6 percent bond. Note: Bonds and mortgages have different interest compounding periods, which impacts their “effective return,” but not by enough to worry about.

Before-Tax and After-Tax Returns: In comparing the return on mortgage repayment with the return on alternative investments that are taxable, it doesn’t matter whether the comparison is made before-tax or after-tax. If you are comparing repayment of a 6 percent mortgage with acquisition of a 5 percent bond, for example, the before-tax comparison is 6 percent versus 5 percent. The after-tax comparison, assuming the borrower is in the 40 percent tax bracket, is 3.6 percent versus 3 percent. If mortgage repayment earns the higher return before-tax, it also earns the higher return after-tax. If income on the alternative investment is not taxable, however, returns should be compared after-tax.

The Investment Decision: In general, borrowers should repay their mortgage when their mortgage rate is higher than the return on alternative investments of comparable risk. Since mortgage repayment carries no risk, the safest application of this rule would limit alternative investments to government securities, insured deposits and other federally guaranteed assets. The returns available on such assets would usually be below the mortgage rate.

Borrowers can also compare the mortgage rate with returns on assets that do carry risk. To justify selecting such assets, they should carry a return above the mortgage rate large enough to justify the greater risk. But that is a difficult judgment to make, and it should reflect the capacity of the borrower to take the risk, which among other things varies with the borrower’s age.

For example, I usually recommend that seniors involved in this exercise limit their selections to fixed-income assets. Over long periods, investment in a diversified portfolio of common stock yields a significantly higher return than mortgage repayment, but the volatility of returns on stocks is very high and includes episodes of negative returns, such as the one we are in now. Seniors may not have the time to wait for such episodes to run their course.

Allocating Excess Cash Flows: Borrowers are faced with two types of mortgage repayment decision. In one, they invest excess cash flows each month over an indefinite future period. They should allocate excess cash flow to mortgage repayment if the mortgage rate is higher than the return, adjusted for risk that can be earned that month on newly acquired financial assets. The owner confronts a new investment decision every month.

Liquidating Financial Assets to Repay the Mortgage: Many seniors are faced with a different type of decision — whether to liquidate financial assets in order to repay the entire mortgage loan balance. In making a one-time investment decision that is irrevocable, the borrower can’t adjust to future changes in the investment rate. He has to look ahead and anticipate what these changes might be and how long he will be around.

To help deal with this problem, I developed a spreadsheet that allows a borrower to enter any scenario for future interest rates, and compare his wealth in every future month in the two cases: where he liquidates his assets to repay the mortgage at the outset, and where he retains both the mortgage and the assets. The spreadsheet is on my Web site and is titled Loan Repayment Versus Investment. Seniors confronting this decision may find it instructive to play with the spreadsheet.

Anticipating a Reverse Annuity: Seniors in modest circumstances who have no interest in leaving an estate may have a special reason to prefer mortgage repayment to asset accumulation as a way of increasing their wealth. After age 62, the equity in their house can be converted into income by taking out a home equity conversion mortgage (HECM) while they continue living in the house. If there is a mortgage balance at the time, it must be paid off with proceeds from the HECM, which reduces the income the owner can draw.

In the current home sale market, it might seem ludicrous to make an offer on a listing if it means competing with another buyer. However, multiple offers are on the rise in some markets. But, it doesn’t always mean that you need to pay a lot more than the asking price.

Sellers are ever hopeful of receiving multiple offers. These days, this is usually an unrealistic expectation. That is, unless the listing is a prime property in a high-demand neighborhood where few homes are being offered for sale.

Price is a critical part of the equation. Some sellers price their homes low because they need a quick sale. If the price is below market, multiple buyers could step forward with offers. Sometimes an overpriced listing is reduced to market price or below and results in offers from more than one buyer.

Most multiple offers today are on low-end foreclosure properties. Investors make up a large part of the buyers in this segment of the market. In some areas of California and Florida, prices have fallen 40 percent since the market peaked in 2006.

HOUSE HUNTING TIP: Don’t shy away from making an offer just because there is more than one offer. In some cases, a dozen or more buyers make offers on foreclosure properties that are listed at bargain prices. But, the highest bidder is not always the winner.

Even in non-distressed-sale situations, multiple offers in today’s market don’t always result in an overinflated sale price. For instance, a charming older home on a sought-after street in the Crocker Highlands neighborhood of Oakland, Calif., sold after only two weeks on the market with multiple offers. The property was listed for $1.3 million, and sold for $5,000 above that price.

In another case, buyers from the East Coast bought a home in Marin County in the San Francisco Bay Area. Against their agent’s advice, they offered less than the asking price even though they were competing against other buyers for the property. Their offer was the lowest of three offers, but it was accepted by the sellers. The reason the sellers accepted the lower offer was that the winning buyers had solid financial backing.

There are far fewer financially qualified buyers in the home-buying market today than there were two years ago due to credit tightening, more rigorous financial qualification requirements and recent stock market losses. In some areas, as many as one-third of home sale transactions fail to close, often due to the inability of buyers to obtain the financing they need.

Sellers who receive more than one offer should carefully consider all aspects of the offers, not merely the offer price. An offer from an all-cash buyer who doesn’t need a mortgage to finance the purchase, and who can close quickly, should be taken seriously even if the price is lower than the other offer(s). However, some all-cash buyers — who are fully aware of their strong position in this market — feel they are entitled to a major price discount.

Whether or not you’ll have success countering for a higher price will depend a lot on the profile of the buyer. Buyers who intend to occupy the property for the long term are more likely to pay more than will investors who base their purchase decisions on the numbers, not their emotions.

THE CLOSING: Sellers should try to keep greed out of their decision when faced with multiple offers. Today’s buyers are willing to walk away from a negotiation rather than pay over market value, or it they think the sellers are unreasonable.