What is the Difference Between a Short Sale, Foreclosure, and an REO?

I’ve been asked this question many times over the last couple of years. What I realized is that because we are dealing with all of these on a daily basis, I forget that not everyone knows what they all mean. So I’ll lay out the basic differences of the three terms for everyone here. It is likely that you are seeing and hearing these terms everywhere, whether it is the internet, newspaper, or TV news. They have become a significant part of the real estate marketplace but there are distinct differences between the three.

Let’s Start with Short Sales –  Short sales occur when borrowers (homeowners) are no longer able to make their mortgage payments and owe more on their home loans than what the homes are worth in the current market.  If they choose to do a short sale, they will list their home with a Realtor for the current market value and then the lender agree to take less for the home than the amount of the borrower’s loan. The seller is still the owner of the home and remains involved in the process and will have to accept the offer as well.  Once the offer is signed and accepted by the homeowner, it is then sent to the bank where it goes through an often lengthy process for their approval.

Short sales are typically a first step towards avoiding foreclosure and are considered a far better alternative. They are very almost always complicated and there is no guarantee of success. The lender is not obligated to take a short sale and in most cases the process to get one approved can take a long time. A typical short sale can take anywhere from 3-6 months to be resolved (or longer even).

In order to determine if a short sale is the best alternative for you, it is always recommended that you speak with your tax advisor, financial planner and Realtor.

What about Foreclosures? –  Foreclosure is when the lender takes a property back from a defaulting borrower or homeowner.

When a homeowner fails to make the payments on his/her mortgage and have not exercised other options, like a short sale or loan modification, the lender can begin foreclosure proceedings.  When a bank takes back a property through foreclosure, it is not handled by a Realtor. Foreclosure properties are auctioned at a Trustee Sale at the Court House in the County where the property is located. Foreclosure properties must be paid for in full, with a cashier’s check at the time of the auction. Some of the best deals can be purchased at Trustee Sales but we don’t encourage buyers to do so unless they are experienced investors as there can be title problems, IRS liens, Tenants or owners still occupying the property, and/or structural problems. The prices may look good but if you don’t know what you are buying then the costs can really add up once you take possession of the home.

And REOs? –  REO stands for Real Estate Owned property.  It is different from a foreclosure sale in that, the bank was unable to sell the home at the Trustee Sale and so has taken ownership of it. The bank will then hire a REALTOR to sell the property.  In order to prepare the reclaimed property for sale, there are several steps that the bank might need to take. Depending on the property and its condition, the bank may need to evict tenants, do trash outs, clean or even do minor cosmetic improvements.  That is one of the benefits of purchasing an REO.

If you make an offer on an REO, your Realtor will submit the offer to the bank and it will need to go through an approval process but that process is usually much faster than that of a short sale. The response time from the banks for REOs is usually more like 2-7 days but of course, that will vary case by case.

With all three situations, there are often great deals to be had but do your homework. Speak with your Realtor about them and make sure you understand the process.

Calabasas Real Estate and Calabasas Homes for Sale

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