In the world of residential real estate, most transactions involving the sale and purchase of a house happen between an individual (or family) that wants to sell a home and an individual (or family) that wants to buy a home.
In general, most transactions happen between willing parties, but not all. Every year there are thousands of homes sold under some form of financial duress.
Short Sale Vs Foreclosure Vs REO Properties
There are three types of transactions that are outside of the normal person-to-person exchange of property. The common denominator in these transactions is usually some sort of financial distress or loss. The owner of the property did not or could not meet the financial obligation of their mortgage, necessitating a solution.
Short Sale
The quickest definition of a short sale is the sale of a home for less than is owed to the mortgage company. This typically happens when the homeowner has gotten behind on payments and must sell the property to avoid foreclosure.
The lender or mortgage loan servicer must agree to accept less than what is owed, and the amount waived may be subject to future legal action and/or taxation.
Foreclosure
A foreclosure is a complex, typically multi-year process with multiple steps. Many people think of foreclosures as homes being auctioned because the owner could not pay. However, a foreclosure process starts long before a property goes to auction.
The process with a Pre-foreclosure stage is in which the homeowner is in default of their loan obligation and is at risk of foreclosure. An actual foreclosure takes place when demands for payment are not met, and the lender repossesses the property and attempts to sell it, typically at an auction. The homeowner may or may not remain in the home during this process.
Real Estate Owned – REO Properties
A home becomes an REO property when the home went through the foreclosure process and did not sell at auction. The property has been officially repossessed, meaning ownership has reverted from the homeowner to the lender or lender representative. These properties are also called “bank-owned” and can be a drain of resources to the bank or lending institution, which typically aims to sell the property as soon as possible.
Complex Real Estate Transactions
Short Sales, Foreclosures, and REO Property sales are complex transitions that can have life-changing financial and legal consequences. It is important that homeowners or buyers entering into any of these transactions understand the process and risks involved.