The above terms have become every day words in our current real estate vocabulary.  However, we find there is some confusion for many people as to what the terms actually mean and how they impact us as potential buyers or sellers of real estate.

 

Short Sales....A short sale occurs when the seller owes more on the home than what the market value is for that home.  In this scenario the Seller asks the lender (or lien holder) whether they would accept less than what is owed.   rather than the seller giving the keys back to the lender (in lieu of foreclosure), letting the property go into foreclosure through the foreclosure process, or (in some cases) declaring bankruptcy.
 
Since lenders are not in the business of taking homes back and reselling them, many of them will consider taking less than what is owed in order to prevent the costs and efforts of having to deal with foreclosures and subsequently REO's (see below).
 
If a seller can successfully complete a short sale, they will take a hit on their credit (usually 2 years) but it is not as severe as a foreclosure.  Also, the seller may be responsible for paying taxes on the debt relief (consult your accountant or tax attorney for details specific to your situation).

   
The bank does have control as to what price they are willing to accept in lieu of the full mortgage amount and related costs, and have the final say of whether or not they will accept an offer for less than what is owed.  This process takes a lot of coordination between the seller, the bank, and the real estate professionals who are hired to help in negotiating a short sale and for the marketing of the property. This process also can take many months to complete.
 
Foreclosures....In this scenario the owner is unable or unwilling to continue making payments on their home.  Once the bank sees that the loan payments have ceased and that the Seller has chosen not to continue to pay, the bank files/records a "Notice of Default" which notifies the owner of their intent to foreclose. 
 
The bank then hires a title company or similar entity to begin the foreclosure procedure which requires public notices, postings on the property, legal disclosures to the owner, etc. for a minimum of 3 months and 21 days.  At anytime during this time period, the owner can redeem his property by bringing his payments current and paying any associated penalties and fees.  More likely, however is that the owner will be attempting to sell the property, frequently as a short sale.  If the owner is unable to sell before the end of this notification and redemption period, the title company is instructed to auction the property off to the highest bidder who, in effect, bids at a price that covers the amount of the loan, expenses, etc.  Bids at these auctions or Trustee sales must be in cash.  If no one bids on the property or if the bid is not adequate to cover the loan and related foreclosure expenses, the bank takes back the home and it becomes an REO (see below).
 
In this scenario, the owner whose home goes into foreclosure takes at least a 7 year hit on his credit.
 
Real Estate Owned (REO) . . . An REO property is a property that has gone through a foreclosure process (or in lieu) and ultimately is not redeemed or sold at the foreclosure auction. It is now "owned" by the bank or lien holder. Since banks are not in the business of owning and maintaining homes, they either hire a real estate firm or real estate auction company to sell property "as quickly as possible."
 
In these cases, normally the bank has not received any payments during the foreclosure process and will continue to incur losses on the property until the property is sold.  To minimize their losses, banks are normally willing to sell such properties below current market value.  Since the banks have never occupied these properties, the sales are always sold "as is" with no obligation of disclosure nor repairs.  
 
Prudent buyers need to hire professional inspectors to inspect the property top to bottom to insure they understand the true condition of the home they are buying. In most cases, REO's are priced so competitively (below the competition on the regular market), that they usually produce a sale price at, or near, the asking price (sometimes higher). But in nearly all cases, banks selling their Real Estate Owned properties end up selling the property for less than what was owed when they took the property back.

 

 

If you would like more information either about the foreclosure process or would like information about homes for sale in the Truckee/Tahoe area in the above categories, please contact us at anicholls@dicksonrealty.com