Terminology - defining REO vs. Short Selling
Saturday, January 10th, 2009Hello, Amber here! I began working in real estate a few months ago, and found myself needing clarification on much terminology - words I'd heard being used over and over - but could not define or differentiate from another. Being new to the industry has given me a great chance to provide DROdio Real Estate with an "outsider's" perspective, so I can focus on giving you the answers to the questions I have been asking every day. Luckily there are a lot of smart, experienced people here to help me get answers, so if you ever have a question you'd like answered, don't hesitate to ask. Just use the contact form at right, and it'll come right to me. Since 'foreclosure' is the hot topic of this past year, I thought I'd take some time and clarify the key terms.
Short Sale: A short sale is when a lender agrees to take less than the full amount owed on a property. This usually happens when the owner is in default (has not been making their mortgage payments) and the bank agrees to this in order to avoid foreclosure. The costs of foreclosure usually outweigh the loss the bank would take on a short sale, and would help the bank avoid risks such as not being able to sell the house at an auction. Since banks are not in the business of managing real estate, they'd much prefer the money, even if its less than they're owed.
Foreclosure: Foreclosure is the act of the bank taking ownership (or title) of the property as a result of the owner's default on their mortgage payments. This is a very specific legal process, with set timelines and outcomes. Once foreclosed on, the owner no longer has possession of their property's title (unlike in a short sale where they hold the title and sell their property). Foreclosures are NOT sold by a Realtor, but instead sent to be auctioned at a Trustee Sale at the Court House in the County where the property resides. Here, properties are sold for much less than other properties in the area, but come with HUGE risks such as title problems, IRS liens, or tenants/owners still occupying the property. Only serious investors should consider buying a foreclosure.
REO: REO stands for Real Estate Owned properties. If a property does not sell at an auction, then the property becomes an REO, owned by the bank. The bank then hires a Realtor to sell their property, and will usually free up any liens or title issues with the property in order to sell it quickly. Banks are not in the business of owning properties, and REOs tie up their capital reserves and make it more difficult for them to continue lending. Therefore, an REO property is generally the best bet for getting a good deal on a property!*Hope you find this info helpful. Stay tuned for more articles around this topic...
