What's the Difference Between Short Sale and REO Properties?

REO, short sale, foreclosure...

We hear these terms all the time yet they all just seem to get jumbled together and used interchangeably. Why not take a quick moment and sort them out once and for all?

A Short Sale is a property that is in default but still technically owned by the owner. Banks give the owner permission to list the property for sale but also agree to accept less than the outstanding debt as a final sales price. The sales price on a short sale must always be approved by the bank and can be a quite lengthy process, often extending anywhere from 1 to 3 months as the bank collects offers on the property. Bottom line on a short sale: you're buying from the owner, it's still a bidding process, bank must approve all offers since they're agreeing to take a loss.

A Foreclosure is a property currently in default where the bank has legally initiated foreclosure proceedings. Many times, properties in foreclosure are offered as short sales for the bank to avoid having to complete the foreclosure process or hold the property as inventory on their books.

A REO (Real Estate Owned) is a property that has gone all the way through the foreclosure process and is now owned by the bank. Buyers purchase the home straight from the bank. A difference between short sales and REO properties that should be noted is the disclosure process. Since you're dealing with the owner when buying a property at short sale, standard disclosures apply as you're purchasing from the "occupant." In the case of a REO, the bank has never "occupied" the property per se, so they are generally exempt from many of the standard disclosures.

In the case of both short sales and REO properties, be ready to foot the bill for your own inspections and complete a thorough due diligence process.