What is the difference between short sales, foreclosures and REO’s? 

What is the difference between short sales, foreclosures and REO’s?

There are many confusing terms regarding “distressed properties”. I’d like to help explain the following terms often used in Real Estate: Short Sale, Foreclosure and REO.

What is a Short Sale?

A short sale often occurs when the proceeds of a real estate sale fall short of the balance owed on the property. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic and/or financial hardship on the part of the mortgagor. A short sale is typically executed to avoid foreclosure. Many lenders prefer a short sale in lieu of foreclosure because the cost of foreclosing on a property may be more than the bank’s loss by taking a short sale. Short sales are extremely complicated and the outcome is not guaranteed. Banks are not obligated to take a short sale and the process through which the sale is approved is often time-consuming and frustrating for all involved. With the current market conditions banks are inundated with short sales and the approval process can take months. Each short sale request is evaluated on a case by case basis and many times there is more than one lender involved complicating the process even more so.

The advantage of a short sale to the seller includes avoiding foreclosure on their credit history and partial control of the monetary deficiency. However, there are many legal issues that mare arise during the process and homeowners should consult an educated real estate agent and attorney before deciding if a short sale is a viable option.

The advantage of a short sale to the buyer is purchasing a property at below market value. However, buyers should also consult with a real estate agent and attorney when purchasing a short sale so they are aware of the issues involved in the process. The last thing a buyer wants to do is spend money on home inspections, appraisals etc… and then have their contract canceled because the short sale is not approved.

In short, a short sale is negotiating with lien holders on a payoff for less than what they are owed.

What is a Foreclosure?

A foreclosure is the legal proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a mortgagor’s equitable right of redemption and takes possession of the property.

Sellers go into foreclosure when they stop making payments on their mortgage. Few choose to go into foreclosure voluntarily. Often times it is due to unemployment, medical conditions, excessive debt or divorce. In a foreclosure, the lender takes possession of the house and the homeowner is no longer a party in the sale.

Foreclosure proceedings vary from state to state and they are not sold by Realtors. Foreclosed properties are auctioned at a Trustee Sale at the court house in the county where the property is located. Many times buyers are not allowed to inspect the property prior to making an offer and purchasing a foreclosed property involves risking various problems that are normally not associated in a “normal” real estate transaction. These problems may include: title issues, IRS liens, tenants or owners still occupying the property and structural issues. Foreclosures are the most risky way to purchase a property and only seasoned investors should consider this option.

What is an REO?

REO is an abbreviation for Real Estate Owned properties. These properties go back to the mortgage company after an unsuccessful foreclosure auction. Many times foreclosure auctions do not result in a bid on the home because an investor does not find the property to be a good investment.

Real estate owned properties also known as bank owned properties can be listed with a Realtor who is hired by the bank to market and sell the home. The mortgage loan no longer exists and the bank will handle the eviction, if necessary. They will also do some repairs, negotiate with the IRS for removal of tax liens and pay off any homeowners association dues.

Each bank/lender works a little differently but they all have similar goals. They want to get the best possible price and usually have an entire department set up to manage their REO inventory. Once you make an offer to purchase, banks may present a “counter-offer”. They need to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. Your offer or counter-offer will probably have to be reviewed and approved by several individuals working on the banks behalf.