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What's the difference between shortsales, foreclosures and REO's?

Posted at 8:00 AM, Feb. 9, 2008

There are many confusing terms out there today regarding "distressed properties". I'd like to take a moment to layout the different terms used in Real Estate such as Short Sale, Foreclosure, REO, etc. to help you understand what you are seeing. Many Realtors use some of these terms more for marketing purposes because the general public associates those certain words with good value. This is not always the case. Each home should be evaluated on a case by case basis.

 

What is a Short Sale?

A short sale occurs when a lender agrees to take less than the full loan payoff for an owner's property. In most cases, the owner is in default and is not making their payments for whatever reason.

Short sales, in most circumstances, are the first step to avoid foreclosure. Although the lender(s) will recover less than the total loan amount in a short sale, they may prefer this in lieu of foreclosure. The costs of foreclosing on a property may be more than the bank's loss by taking a short sale. Also, the property may not sell at auction and then the bank would be forced to take it back as an REO (Real Estate Owned) property, which then they would have to maintain, list and sell themselves.

Short sales are very complicated and the outcome is not guaranteed. There are so many variables that I can not even cover everything in a couple paragraphs. The bank (lender) is not obligated to take a short sale and in most cases the process to get one approved is cumbersome and frustrating for the Buyer, Seller and the Realtors. Many times these requests are not approved by the bank and the property ends up going to foreclosure anyway. Banks are overwhelmed with short sale requests and the approval process can take months. Each bank evaluates each individual request on a case by case basis. Many times there is more than one lender involved. Not only do the banks consider the borrower's personal and financial situation, but they also consider an appraisal of the property, market conditions, the banks financial situation, their current portfolio and in many cases have to consult with an outside investor who purchased the loan at some point. Given all of these varying circumstances, you can imagine why this process takes so long. Most buyers do not want to wait out this long process and deal with the uncertainty. If a short sale is approved, it can be below market (depending on the bank appraisal), but by the time it's approved the market may have further declined and it may not be a great deal after all.

If you are considering selling your home as a short sale, please consult with a CPA and an Attorney first! Realtors ARE NOT qualified to give you the type of information you need to decide if a short sale is right for you. Depending on the types of loan(s) you have and your financial situation, it may or may not be the best option for you.

 

What is a pre-Foreclosure?

A pre-foreclosure is basically a property prior to the Notice of Default (NOD) being filed. Basically the homeowners are in trouble and likely are in default of the loan. They may be trying to sell the home before it is taken through foreclosure. It's just a marketing term to attract attention to the property as being a "distressed sale". Realtors use this term to create interest in possibly purchasing a home below market value. This may or may not be the case. Further research needs to be done on each home to determine the value.

What is a Foreclosure?

Foreclosure is the process whereby the lender takes possession of the property.

When a home owner fails to make the payments on his/her mortgage, the lender can begin foreclosure proceedings. This is a very specific legal process with set timelines and outcomes. In a Short Sale situation, the home owner's name is still on title of the property and they are the official owners who are trying to sell the property. In a foreclosure, the lender takes possession of the house and as a result, the homeowner is no longer a party in the sale.

Foreclosures are NOT sold by Realtors. Foreclosure properties are auctioned at a Trustee Sale at the Court House in the County where the property resides. Foreclosure properties must be paid for in full, with a cashiers check at the time of the auction. Only seasoned investors should consider this option. When you purchase a home at a Trustee Sale, you could be at risk of various problems that are normally investigated by Realtors and Title Professionals in normal sales transactions. These problems are serious!!!! Problems such as: Title problems, Superior loan pay offs, IRS liens, tenants or owners still occupying the property, and/or structural problems. The price may seem good at auction (priced well below other houses in the neighborhood), but your costs and risks may come after you try to take title. Properties that are a good investment are purchased by seasoned investors who find a way to get them before anyone else. Unless you really know what you are doing, this is the most risky way to purchase property!

 

What is an REO?

REO is a abbreviation for Real Estate Owned properties.

If no one purchases the property at the Trustee Sale, then the home becomes an REO property, owned by the bank. The main reason homes don't sell in a Trustee Sale is because it doesn't work out to be a good investment for a potential real estate investor.

A home that has been "foreclosed" and has become a bank owned property can then be listed by a Realtor who is hired by the bank to market and sell the property. To sell the house as quickly as possible the lender will remove any liens on title, and clear any other issues that may slow down the sale of the property. Generally, lenders are very motivated to sell these properties, as they are in the business of lending money, not owning real estate. REO's tie up their capital reserves and hamper their ability to lend money. Also, the management of these properties can become very costly. This is the best opportunity to find a good deal.

 

Note: there are many homes out there for sale that are not distressed properties. The owners have a lot of equity, are motivated to sell and have priced their homes to move quickly. Distressed properties are not always the best way to find a great deal.

 

For more information or if you have any specific questions, please feel free to call or email me anytime.

christinalegrand@kw.com

Article originally published in CA.  Laws and forclosure process may vary by State.  Now in Cary, NC with The Bliss Real Estate Group

 


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Dorene Shirley at 12:25 PM, Feb. 9, 2008

Christina,
 
Good info...another confused term is Deed in Lieu of Foreclosure.  I cut and pasted excerpts from an article I published last year.  Hope you don't mind the addition.
 
"Definition of a Deed in Lieu of Foreclosure
The Deed is a recorded document in which a borrower (homeowner) conveys all interest in the home to the lender to avoid foreclosure proceedings. 
 
For many people facing foreclosure, it would be simpler to give the property back to the lender rather than having the home foreclosed on. It’s much better for the homeowner when it comes to their credit report. Another advantage is the home-owner can avoid going through the humiliation of a public auction as well as avoid a possible deficiency judgment. 
 
What’s in it for the lender? 
Well, it will save them the cost of the foreclosure process and a lot of time.  In many states, foreclosures can take up to four months to complete.  A Judicial Foreclosure can take even longer.
 
In fact, back in the 80’s when I had the nasty job of “foreclosure officer” we would receive recorded “Deeds in Lieu” from the borrower all the time. We never accepted them. The lender always continued the foreclosure process. For a Deed in Lieu to be valid, it must be approved by all parties.
So why won’t the bank or mortgage company take the expedient way out and simply accept a deed back?  It’s the same result – they get the property to sell.
 
Advantage of foreclosure
For the bank, the advantage of the foreclosure process is that it wipes clean any subsequent lien or loan against the property.  A deed in lieu won’t do that, and the bank could be stuck owing money to a second mortgage or a judgment.  To the bank, it’s worth the money and time to make sure that there isn’t anything lurking out there impairing the property. "
 
Keep up the good work on informing the public.  I'm sure our current situation will get worse before it gets better.
 
Dorene

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Christina Hunter-Legrand at 7:52 AM, Feb. 10, 2008

Great addition to the Blog.  Thank you for this important information!

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Portland Real Estate at 3:08 PM, Mar. 5, 2008

Short Sale is a bank taking a loss and avoiding a foreclosure.

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Jeremy at 8:39 PM, Apr. 8, 2008

Christiana,
 
I will also agree that your article is informative. In today’s Real Estate era, the term Foreclosure is used way too often and many people do not really know the steps in the foreclosure process.
 
Though you have great articles on your site, I have some comments with your term of ‘what is a pre-foreclosure’
 
I would never consider a pre-foreclosure a short sale or a sale of a home, simply because during this phase of the foreclosure process, the original home owner is still very much control of the outcome. They simply have to alleviate the defaulted amount. This can happen by many ways not including the actual sale of the home or a short sale. Though, the term Foreclosure is the forced sale of real estate to pay off an existing debt, the pre foreclosure process is simply a hyped up term where the lender has issued a NOD (Notice of Default) or a NOT (Notice of Trustee’s Sale).
 
Anyways, interesting articles.
 

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Kay Kolt at 2:09 PM, Apr. 11, 2008

This looks like information that we all need to be aware of....for some of you it is knowledge you have had for years, for me it is all new.

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Lisa at 11:23 PM, May. 4, 2008

Excellent, finally I get the picture, sad to say I am a Realtor...lol..Thank-u

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Lisa at 11:25 PM, May. 4, 2008

Excellent, finally I get the picture, sad to say I am a Realtor...lol..Thank-u

RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Gonzalo Bueno at 10:52 AM, Feb. 22, 2009

Thank you, very good info. May I ask you a question?

Do you know after the public auction which results in the sale of the house, what's next for the ex-owners still living in the property?....The new owner will invinct them, how long will take to the people still living in the property to be forced to move out?

I wil appreciate your response. I do have a client that just this friday the property went to public auction and we don't know what is next. Thank you again in advance. Regards,

Gonzalo Bueno


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Dana at 4:07 PM, Mar. 13, 2009

Great article!  Thank you for clearing up the difference between the different types of distressed sellers/properties.


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Demi at 7:00 AM, Mar. 21, 2009

Good Info , great blog ,Christina.

Demi


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by MIGUEL PARDO at 11:08 AM, Apr. 25, 2009

Thank you for the definitions. There should be more of this education for the general public as well as realtors  to help avoid misunderstandings and work more effecively.


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by sarahbeachesva beaches at 6:26 AM, Nov. 13, 2009

thanks for the article i agree with you great content i love it.

 i learned a lot from this about the difference between short sale and foreclosure i hope you may publish more good article that will really help us a lot thanks


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Anonymous at 2:01 PM, Feb. 2, 2010

For a short sale, provided that you send an offer and waitng for the lender's approval. Do you have to execute the offer once the lender approved after let's say, 3 months.?

 

 


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Christina Hunter-Legrand at 3:23 AM, Feb. 13, 2010

It depends on how your contract is written.  In CA for example, the contract was not executed until the buyer received an approval letter from the seller's lender.  And at that point the contingency period would start.  If your State does not provide for a short sale addendum, your Realtor should create one for you that protects you. 


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Sheila at 9:19 PM, Feb. 20, 2010

so what happens when you sign a purchase agreement on what i understand to be a REO. the house was on the fannie mae website and we wanted to buy it. after the purchase agreement had been signed for several weeks now fannie mae says they have an approval for a short sale and can't sell the house??? can they do that??? they want us to sign a piece of paper relinquishing them from the offer? what to do?


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Teresa at 1:56 PM, Mar. 18, 2010

What about IRS on floreclosure or shortsale??? Are some taxes to pay for floreclosure of shorthsale? If so, how much based on what amount, and what rate? Thanks


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Jackie Thompson at 4:21 PM, Nov. 12, 2010

As the property owner, when would I have to move in a foreclosure, short sale or deed in lieu of foreclosure.

What about tax consequences?


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Anonymous at 2:36 AM, Apr. 2, 2011

WHEN APPRAISING PRE-FORECLOSURES FOR BANKS SHOULD SHORT SALES AND REO'S BE USED AS COMPARALBES THOUGH THE NEIGHBORHOOD IS NOT DECLINING?


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by oliver at 6:09 PM, Dec. 6, 2011

the short sale house i made an offer for fell through after 11 months of waiting and the tremendous expenses. it appeared that the junior loan was not willing to authorize the short sale. i really love the house despite all. can anyone give me an idea of what to do next in order to not to let it go.please help

thanks,

oliver


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Foreclosures at 10:36 PM, Jan. 27, 2012

I will be looking forwarding to participate in the discussions.<a href="http://www.foreclosuresus.com/">foreclosuresus.com</a>
 


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Dave at 9:54 AM, Feb. 9, 2012

WOW! I always thought a "Short Sale" was when you sell a house to someone under 3ft tall! And a thought a foreclosure was a type of hot dog! No wonder I never passed the real estate licensing exam!


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by shawn at 8:35 AM, Mar. 13, 2012

I have 2 loans with the same bank. If i short sale one of them, can the bank come after my other house with the difference?


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Norman Mazurkiewitz Macaulay at 12:02 PM, May. 10, 2012

I found a condominium under a short sale.

There are over two years past maintenance fees and legal fees owed on this property.

Under a regular Foreclosure The dues to the association would be 12 months past dues or 1% of the original mortgage.

Under a short sale who owes what in the the past dues and legal fees.  is this dollar amount owed to the association negotiable .  

 


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by Eric Eddler at 7:33 AM, Jul. 26, 2012

Recently the economy hasn't been prospering as much as everybody would like. As a result, many people are finding it hard to pay off some of their loans. With payments overwhelming the population, there is an American home mortgage servicing inc reducing foreclosures. Homeward is one of the few lenders doing its best to lower foreclosure rates.


RE: What's the difference between shortsales, foreclosures and REO's?

Posted by glen at 10:44 AM, Sep. 16, 2012

What is the wait period for an owner occupied reo purchase before he can sell that property?

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