Foreclosure, Short Sale, REO: What’s The Difference?

Distressed properties have been crowding real estate markets since the housing crash, and for many, this means a chance to snap up homes at below market value. First-time buyers, repeat buyers, and property investors have all benefited from this trend. But surprisingly few of them understand the basic differences between distressed homes. A foreclosure is different from a short sale, and both are different from bank-owned homes. This article discusses the types of distressed properties and why the difference matters to the buyer.


Foreclosures

A foreclosure is basically a home that a lender has seized because the borrower can no longer pay the mortgage dues. Lenders sell them off in a foreclosure auction, where it goes to the highest bidder. Foreclosure prices are usually low because the home has lost market value and lenders have already taken a loss from the borrower’s missed payments. It’s not uncommon for a home in foreclosure to sell for 40% below market prices. The catch is that foreclosed homes are sold as is, meaning the buyer cannot request repairs or inspections as with a regular sale.
Real estate-owned (REO)

An REO home is a home that has gone into foreclosure but did not get any bids. Lenders then try to sell the home off themselves, often using conventional methods such as MLS listings and realtor services. Usually, they’ll fix up the home and do a title search so that it’s more attractive to buyers. Because of this, REO homes may cost more than foreclosed properties—typically no more than 20% below market value. Unlike in a short sale, buyers do not get a second chance on an offer, as banks get multiple offers and simply go with the highest. REO homes are also sold on as “as is” basis.

Short sale

In a short sale, the buyer sells the home for less than the mortgage they owe and uses the proceeds to settle the loan. Lenders either forgive the difference or claim the deficiency afterwards. This typically happens when the buyer’s mortgage is upside down, or their debt on the home is greater than its current value. Because of this, short sale prices are at most equal to market value; the bank usually decides whether or not to accept less. Short sale homes can be listed the same way as conventional homes, except that offers have to be approved by the lender. This is usually noted somewhere in the home listing so that potential buyers can tell it’s a short sale.