What's the difference between a 'Short Sale' a 'Pre-Foreclosure' a 'Bank Oned Property' and a 'REO Property'??

Many people ask me what's the difference between a short sale, a pre-foreclosure, a bank owned property, and a REO property. This is a great question because of the way one would approach making an offer to purchase a particular property. The requirements, protocols, and timing issues differ greatly.

• A "Short Sale" is basically a collection review committee process. It is handled by several different bank representatives whose sole responsibility is to evaluate the circumstances surrounding the owner's inability to continue to pay for the loan they've obtained, through the original purchase or a refinance home loan and the amount of financial loss the lender will incur in agreeing to a Short Sale. The "Short Sale" title is when the cost of the sale and value of the property is less than what is owed on the property when selling. The existing lender/lenders agree to accept less than what is owed on the property in order to avoid the expense of the foreclosure process. The transaction is complex and requires the owner to fill out additional paperwork that is reviewed by the lender for an approval. Some agents will nick-name this a Pre-Foreclosure Sale as a marketing strategy to attract a certain type of buyer to the property. (Approximately 80% of the Short Sale offers to purchase never close escrow. Beware of the "wolf" type of agents who would encourage a Short Sale listing without sharing the 3 different seller options or the buyer agents who do not explain the Short Sale purchase process fully prior to writing an offer. Inexperience can be costly.)
• A Bank Owned & REO Property are the same. "REO" is an abbreviation for "Real Estate Owned." These properties are the result of a foreclosure and have become the asset/liability of the lender. These REO properties will have no warranties from the bank and are sold in "AS IS" condition. An example of what this means is; the bank has never lived in the property, therefore, exempt from the laws requiring disclosure has limited title exposure and does not have to give a termite clearance, etc. In most foreclosure properties, the previous home owner was financially strapped and usually unable to maintain the property, most likely emotional and angry to boot. There may be unseen damage to the property or other liens on the property that the bank is unaware of also. These properties are usually priced about 5 - 10% below the market and many times the bank may be willing to give some buyer concession such as closing costs. These properties when sold are setting the market comparable in most neighborhoods and have an effect on every one's home value.

The Short Sale and REO purchases are both complicated transactions and are not for the inexperienced. I cannot recommend enough the use of an experienced realtor when trying to acquire one of these types of purchases. There are many new and old laws governing the purchase process of these types of purchases. There can be a degree of risk and exposure to the new buyer and the brokers involved, such as alleged "predatory equity stealing" or there may also be time lines for "seller's redemption." The actual timeline for a "Non-Judicial Foreclosure" is (121 days) and may come into play when purchasing a Short Sale property.