Is it a Short Sale or REO?

Explaining the fundemental differences

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Last year, short sales and REOs made up a significant portion of sales in the Bay Area, Peninsula communities included. As Congress has extended the Mortgage Debt Forgiveness Act through this December, qualifying sellers still can take advantage of this particular tax benefit by selling their home in 2013. So what are Short Sales and REOs? 

When a mortgage borrower can no longer pay for their mortgaged property it can wind up on the market as either a short sale or a REO (Real Estate Owned) property. These types of home sales are alluring because buyers see them as an opportunity to buy a property at a bargain. While both types of transactions can be the product of the same circumstances, the method of sale may be quite different.

What is an REO?
An REO is real estate owned by a bank or a lender. REOs also can be referred to as a repossessed house or a home in foreclosure. These sales find their way to the open market when a home buyer who has bought a home with a mortgage fails to make their payments, forcing the bank or lender to repossess the property. Once this happens a property is put up for a foreclosure auction, and if it doesn’t sell at the auction it becomes an REO. Banks and lenders tend to be motivated to sell the property quickly and sometimes at a price lower than the original loan balance.

What is a Short Sale?
A short sale occurs when a home owner is in foreclosure but before the property goes to public auction. The property still is owned by the owner and not the bank in this type of sale. Under a short sale, a lender must agree to accept less than the amount owed on the property by the original owner. These types of sales almost always will happen in a market where the value of the house is lower than when it was bought. Banks and lenders approve short sales to avoid adding a bad investment and REO to their portfolio, having to pay the property tax on the home, and other issues.

What’s the difference?
Buying an REO is similar to buying a short sale except the property already is owned by the lender. With a short sale, the owner of the home usually still is caring for the house since it is in their best interest to sell the property quickly. With REOs, the property usually is left vacant, and may not receive the same level of maintenance. An REO property purchase may also include an advantage over a short sale in terms of certainty – including time of closing, property condition, and clear title. REOs are considered the best way to purchase a property under a distressed sale because you are dealing with the bank directly and have essentially have cut out the middle man – the seller. 

In either case, the best advice is to work with a real estate agent who specializes in short sales or REOs if going through this process.

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