Foreclosures, Short Sales, and REO’s – what’s the difference?
This is a question that I get all the time. Many buyers and sellers in today’s market are seeing and hearing these terms everywhere, whether it is the internet, newspaper, or TV news, these terms are out there and people are interested. The following is a brief layout of what these terms mean…hopefully you will find this useful!
What Is A Short Sale?
A short sale occurs when the borrower (homeowner) is no longer able to make their mortgage payment and owes more on their home loan than what the home is worth in the current market. The homeowner will list their home with a Realtor for the current market value and the lender will take less for the home than the amount of the borrower’s loan. When making an offer on a short sale, the seller is still involved in the process and will have to accept the offer as well. Once the offer is accepted by the homeowner, the offer will then need to be approved and accepted by the bank (lender).
Short sales, in most circumstances, are the first step to avoid foreclosure. Short sales are very complicated and the outcome is not guaranteed. The bank (lender) is not obligated to take a short sale and in most cases the process to get one approved can be very time consuming. A typical short sale can take anywhere from 3-6 months to close, but this can vary case by case.
Depending on your situation, short sales may or may not be the best option for you as a buyer or seller.
What Is A Foreclosure?
Foreclosure is what happens when the lender takes possession of the property.
When a home owner fails to make the payments on his/her mortgage and have not exercised other options, such as a short sale, the lender can begin foreclosure proceedings. When the lender takes possession of the house, the homeowner is no longer a party in the sale, as they would be in a short sale situation.
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. I do not encourage buyers to consider buying a foreclosure property, unless he/she is an experienced investor as there can be many issues with foreclosed properties.
Some of the problems that can occur when buying a foreclosure can be the following: 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. This can be a very risky way to purchase property if you do not have experience in doing so.
What Is An REO? (Bank Owned)
REO stands for Real Estate Owned property. An REO is different from a foreclosure property in the sense that the bank tried to sell it at a foreclosure auction and was not successful in getting bids, the bank then becomes the owner of the property because the property was not bid on.
The bank will hire a REALTOR to list the property for sell. In order to list the property for sell as an REO, it is often that a number of tasks need to be done before the listing can go “active” on the market. Depending on the property and its condition, the bank may need to do evictions of current tenants, trash outs, cleaning/securing, and more. This is one big perk of buying an REO rather than a foreclosure property.
When making an offer on an REO property, your REALTOR is submitting the offer to the bank (lender) and it will need to be accepted by the bank. Unlike short sales, the wait time on an REO property to find out whether or not your offer has been accepted and you will or will not be opening escrow, is often anywhere from 72 hours to one week, but this can and will vary.
An REO may or may not be the best option or the best deal, this will vary case by case. If you’re considering buying a home in the Boise area, I encourage you to contact me, but in general, it has been seen that when it comes to an REO, there is usually a lot of money to be made.