What’s the Difference Between a Short Sale and a Foreclosure?

House with sold sign in the front yard.

Foreclosure, REO or short sale … What’s the difference?

As a potential home buyer, you’ve probably already come across the terms “short sale,” “foreclosure,” and “REO property.” Although it can be confusing, it’s important to understand the details and differences in these types of properties, especially if you are considering purchasing one. What is a Short Sale?

A short sale is when the lender is willing to take less than the full loan payoff amount for an owner’s property. Generally, short sales are done to avoid foreclosure. Neither the owner nor the lender wants foreclosure, as it can be a very costly and unpleasant process. A home owner who has not been able to make their mortgage payments can apply for a short sale, but lenders are not obligated to accept it. Lenders take each short sale application on a case-by-case basis. Sometimes the loss a bank would take on a short sale is less than the loss they would take if the property went into foreclosure. In a short sale situation, the home owner’s name is still on the title and they are still considered the seller. The bank is simply entering into an agreement to accept less than what is owed on the property.

The term “short sale” can be misleading. The word “short” refers to the amount of money received by the lender, not the amount of time to complete the transaction. It can be a long process with many individuals and departments within the financial institution involved. If you put in an offer to buy a short sale property, it can take months to hear whether or not your offer is accepted. Also, because the lender is already taking a loss, negotiating on things like price, appliances or repairs is generally not an option.

What is Foreclosure?

Foreclosure is when a bank takes full possession of a property and the owner is no longer a party in the sale of the home. Foreclosed properties can be put up for auction at a trustee sale at a county court house. It’s recommended that only seasoned investors should participate in this highly risky purchasing process. When buying a foreclosed home from a trustee sale, you risk encountering serious problems that are ordinarily handled by a real estate agent or other professional. These problems can include title issues, IRS liens, or the property still being occupied. [Read more…]

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