Common Terms Explained: Short Sale, Foreclosure, and REO

A lot of buyers in middle Tennessee and elsewhere are hearing a few terms thrown around more and more often: short sale, foreclosure, and REO. But what the heck do these words mean to the average buyer or seller? Read on to get the scoop!

What Is A Short Sale?

When a homeowner is no longer able to make their mortgage payment and owes more on their home loan than what the home is worth in the current market, they may undertake the process of listing the home as a short sale. If they are able to act fast enough before foreclosure proceedings, homeowner will list their home with a real estate agent for the current market value and the lender will take less for the home than the amount of the borrower’s loan. In this case, both the seller and the bank will try and list the home for at least as much as currently owed on the loan.

When making an offer on a short sale, the seller is still involved in the process and will have to accept the offer as well. Once the offer is accepted by the homeowner, the offer will then need to be approved and accepted by the bank.

Short sales, in most circumstances, are the first step to avoid foreclosure. Short sales are very complicated and the outcome is in no way guaranteed. For the vast majority of mortgages, the lender or bank is not obligated to accept a proposal for a short sale and in most cases the process to get one approved can be very time consuming. A typical short sale can take anywhere from 3-6 months to close.

Depending on your situation, short sales may or may not be the best option for you as a buyer or seller, but they can be a very good way to slide into a property priced below its market value.

What Is a Foreclosure Property, and Why Should I Care About Them?

When a home owner fails to make the minimum payments on his/her mortgage for a sufficient amount of time, and have not exercised other options, such as a short sale, the lender can begin foreclosure proceedings. A foreclosure is what happens when the lender takes possession of the house and the homeowner is no longer a stakeholder in the sale, as they would be if they had executed a short sale scenario.

It is important to understand that real estate agents play no part in the listing or sale of a foreclosed home. Foreclosure properties are generally auctioned at a Trustee Sale at the Court House in the specific county where the property resides. And pretty much without exception, foreclosure properties must be paid for in full, with a cashiers check at the time of the auction. There is generally little to no time or availability for a buyer to physically tour the home, and though these foreclosure listings are generally priced at lowball offers, many of the residents, once the home becomes foreclosed, fail to undertake many general maintenance activities on the homes- meaning that the low upfront cost is often mediated by large repair bills.

For this reason, we recommend all but seasoned investors and property buyers steer clear of foreclosed listings.

Title problems, Superior loan pay offs, IRS liens, Tenants or owners still occupying the property, and/or structural problems are all issues which frequently plague properties bought at foreclosure auction. The price may seem good at auction (priced well below other houses in the neighborhood), but your costs and risks may come after you try to take title.

I've never even heard of an REO. What the heck is that? 

REO is jut an acronym for Real Estate Owned property. Ever wonder what happens at the end of a home foreclosure auction if the home isn't bid on? It becomes an REO. This means that no one purchased the home during the foreclosure process, so now the bank owns the property. But wait, that's not the end of the story!

In order to list the property for sale as an REO, the bank has a laundry list of tasks it needs to complete. This may include evicting the prior residents/owners, cleaning and securing the property, making necessary repairs, and so on. Since many foreclosure homes have not gone through this process, REO homes can definitely be more attractive for buyers. When all this is completed, or sometime during this process, the bank will hire a real estate agent to re-list the property.

When a buyer chooses to make an offer on any REO property, it is important to remember that there may be a much longer wait time to find out if your offer has been accepted. This is typically several days, and in some cases, weeks.

In Short

In short, being aware of these different types of properties can help buyers be more aware of how they might be able to find a home listed under market value while still avoiding common pitfalls. It is also useful information for home buyers, because one never knows when life might throw them just the sort've curveball that may require knowing how to avoid foreclosure. 

If you'd like to view current Nashville listings, are interested in selling Nashville property, or have any questions, please take a look at the Holt Real Estate Group's main website.