Bank Owned (REO) vs Short Sale
Pre-Foreclosure – This term often doesn’t have a legal meaning. What it
usually means in day-to-day practice is that the home owners are trying
to sell because they know they have either stopped (or will soon stop)
making the mortgage payment. Often, the home owners also know or
suspect that they can’t sell for what they owe on the home, and any
resulting sale will be a Short Sale.
Short Sale – In this case, the homeowner has usually stopped paying the
mortgage. In addition, the home is worth less than what they owe the
lender. If they’re able to (1) find a buyer and (2) get the lender’s
blessing on the deal, the lender will accept a portion of the total
loan payoff amount. The lender is left short, hence the name.
Short Sales are sometimes great bargains for buyers, but know that
buying a short sale property can take months. The home comes without
any disclosures about condition, and is sold As Is. Buyers can inspect
the house but Sellers/Lenders won’t do any repairs. Sellers/Lenders
will almost certainly not contribute to the Buyers’ costs.
Finally, you have to play a waiting game. Lenders are overwhelmed, they
were never set up to operate a real estate brokerage in the first
place, and will probably take a month or more to even acknowledge
receipt of a Buyer offer. To add insult to injury, if you don’t submit
a complete package of documents, you’ll be waiting even longer while
the lender requests docs one at a time.
Foreclosure – Foreclosure is a term for the process of a home's
ownership changing from the purchaser to a new buyer (through short
sale or auction), or back to the Lender as an REO
REO – Also known as Lender Owned. One way or another, the lender now
owns the home. Maybe the homeowner just mailed in their keys and
disappeared. Maybe the home wasn’t bought at auction. In any case, the
lender owns it. They’ve already taken a loss against the original loan
balance on the property. REO properties carry all the downsides of
Short Sales except that you’re more likely to get an answer within days
or weeks on REO properties. However, the bank is unlikely to take much
below list price. They’re already taken a big loss and usually these
properties are listed pretty close to the rock bottom of what the bank
will accept.