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."

Short Sales and REOs: What’s The Difference?

"The troubled real estate market has led to an influx of distressed homes, which now make up as much as half of the inventory in some areas. Thanks to the attractive prices being offered, many buyers are snapping up homes they would otherwise not have considered. Unfortunately, not many of them really understand what they’re getting into. For instance, what’s the difference between a short sale and an REO—the two most popular types of distressed homes today? Here’s a quick guide to help you better understand your choices.



Short Sales and REOs

A bank short sale is a home that’s priced below the seller’s mortgage balance, because the balance exceeds its current market value. Banks agree to short sales because the only alternative is often foreclosure, which will cost them even more. REOs, which stand for real estate-owned, are homes that have gone into foreclosure but have been repossessed by the bank because they failed to get bids at the auction. Both are sold at significant cuts and are listed on the MLS just like non-distressed homes.

Selling Prices

A short sale is limited by the seller’s outstanding balance; it cannot be priced more than what is owed. Generally, a bank short sale sells for 85% to 95% of the market value, although some can sell for as low as 60%. REOs are priced according to market values as well, but banks can also take into account any repairs they’ve made prior to listing. Since banks sell REOs solely to get the property off their books, they are priced to sell fast and often offer good deals compared to a bank short sale.

Buying Process


This is probably the biggest difference between an REO and a short sale. In a short sale, the buyer makes an offer to the seller, but it’s forwarded for the bank for approval. The lender has the final word on whether or not the bank short sale can push through. An REO, on the other hand, is sold much like a regular sale, with the bank acting as the seller. They usually take faster because the bank is much more willing to sell.
Where To Find Homes


One can find a bank short sale or REO on the MLS and other mainstream listings, but they can be hard to distinguish from regular homes. Laws have yet to be passed requiring the identification of short sales and REOs. Until then, the best way to find a bank short sale is to look for wording that says a “third party,” meaning the bank, has to approve your offer. REOs can also be found in banks’ private listings, which are usually available on their websites."

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."

Avoid-foreclosure..... Do a short sale..!

Short sales are the hottest thing going in the distressed-property market, and the trend is expected to get even hotter in coming weeks. While a short sale may sound appealing, it's important to understand what a short sale is, how it works and how it can affect your income and tax liability. If you do not understand the process, it could end up costing you a considerable amount of money. A short sale is a complex process, so it's best to work with a professional such as shortsalesafe.com.

If you are facing a debilitating adjustable rate mortgage interest rate increase, you are not alone. In fact, you are among the hundreds of thousands of residents who are in the same situation. If you are unable to continue paying your mortgage payments, you only have a few financial options available to resolve the situation for you and your family. You can attempt to negotiate for a loan modification, reducing your monthly financial obligation. In the event that you can still not make the mortgage payments, you can list your home for sale

A short sale is one of the many ways in which a home owner is able to prevent himself and his property from going into foreclosure. A short sale is a far less expensive process than a foreclosure and it also takes much less time to complete. Buyers of property in short sales will typically negotiate with lenders and lien holders to pay them the debt owed at discounted cost.

Therefore, if you are a buyer who plans to engage into a short sale, it would be wise to ask the opinion of a real estate short sale professional like us. We can provide you with a complete explanation of short sale and how the process works. In this way, you can be prepared to gather all the needed data to accomplish the transaction and move into your new house.