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.

How Foreclosure And Short Sale Affect Your Credit

"Credit is often one’s first concern when they face foreclosure or consider a short sale. That’s perfectly understandable considering the importance we put on credit these days, from getting a credit card to buying a home or car. And when hard times strike, it’s only natural for a homeowner to want to save his credit. But how do you know how you’re your credit will suffer? Below are some of the most common questions on foreclosure and short sale credit impact, and what you can do about them.


How Will It Affect My Credit Score?

In either short sale or foreclosure, the reduction in credit score is a combination of your default and the sale itself. Generally, the losses are much lower in a short sale—some 100 to 300 points (sometimes less) compared to as much as 400 in a foreclosure. The further behind you are at the time of the foreclosure or short sale, the more your credit score will drop as a result.
How Long Does It Stay On Record?

In most states, a foreclosure stays on your credit report for up to ten years. Short sales can stay as little as two years or as much as seven, depending on your lender’s policies and the terms of the sale. One advantage to short sales is that you can negotiate with your lender as to how it will be reported, and if you get a good deal, you may even get them to remove the record sooner.

How Soon Can I Buy A New Home?
The law varies by state, but generally, you have to wait around 5 years after a foreclosure before you can buy a new home. Short sales have a wait time of two to three years, depending on who owns your mortgage. Fannie Mae allows you to buy a home after two years with a certain required down payment; this requirement is lowered the longer you wait to buy. If you did not have a 60-day default when you sold off your home, you can even buy a home immediately afterwords.


How Will It Affect Future Credit?

A foreclosure usually comes with a disclosure agreement which requires you to mention the event when you apply for another mortgage. Mortgage applications usually have a section where you have to indicate whether or not you’ve gone through a foreclosure or similar transactions, and this will affect the lender’s assessment. This happens less frequently in a short sale."

The RPA-CA (California Association of Realtors Residential Purchase Agreement) generally allows you to back out of a short sale deal, provided you didn’t sign any addenda with the seller or his bank. Under the RPA-CA, you get to keep your contingencies—meaning you can cancel the contract as you please—unless you remove them through another agreement, such as a contingency removal or cancellation form.
What Happens To Your Deposit?

If you’ve already made an earnest money deposit, backing out under regular terms will allow you to get it back. It’s only a matter of the short sale seller giving you a refund. As long as the contingencies haven’t been removed, the state’s Notice to Perform and Cancellation forms assures that buyers don’t lose anything in the process.

Why Back Out?

One of the most common reasons to back out of a short sale is title problems. If this is the case, remember that title burdens, such as unpaid homeowner’s association dues, are usually paid and cleared at closing. At this time, the lender usually lets the escrow company settle any fees due and pay other lien holders, if there are any. The short sale will only close once all liens have been cleared from the home. For any other reasons, such as the home’s physical condition, it’s likely that the short sale seller will try to negotiate repair costs before letting you cancel.

When Should You Back Out?

Backing out of a short sale is pretty simple, but it can complicate things in the long run and should still be avoided. Before making any deals, make sure to get a good look at the home, from the physical condition to the circumstances surrounding the mortgage and default. A good short sale agent can help you find useful information on any short sale home, such as how many lenders there are and why the seller wants to get rid of it. If you do decide to back out, ask yourself why and consider alternatives before giving it up."

How A Short Sale Agent Can Help You

Many struggling homeowners have, at one point, considered taking matters into their own hands and pursuing a short sale on their own. After all, it’s hard to see the sense in paying a third party when you’re already about to lose your home. But a short sale agent is often worth every bit you pay them, sometimes more. Here’s how you can get better short sale results with an agent and how you can build a good relationship with them.

Play By The Rules

A Short Sale agent will know local laws better and help you use them to your advantage. For example, a short sale under the government program HAFA (Home Affordable Foreclosure Alternatives) isn’t the same as lenders’ private programs. Depending on your state, there may be rules on how long a short sale can take, how much can be forgiven, or how borrowers are assessed. A short sale agent can help you stay in line and avoid problems caused by non-compliance.

Know The Market

Short Sale Sellers seldom know how the market works, and this can lead to bad decisions. You need at least a working knowledge of your city’s real estate market and home values to make a strong case for your lender. With a short sale agent, you can do your research and use the information wisely. They can help you negotiate the short sale with your bank and back up your case with solid facts.

Get Your Home Seen And Sold

The primary role of a short sale agent is to list and market your home. You can do this on your own, of course, but an agent who’s been in the short sale business for a while will have useful connections that can help the sale along. Besides putting your home on the MLS, a short sale agent will get word around to buyers and their agents, help you prepare the home for viewing, and maybe schedule an open house.

Read Before You Sign

Real estate contracts are always complicated, and that’s even more so in a short sale. A short sale agent can explain each part of the contract to you and make sure you know what the terms are. If there are any vague parts, you can clear it up before proceeding with the short sale. With a short sale agent, you don’t just sell your home and get back on track sooner—you also get valuable tools that you can use in the long run.