The real estate industry is full of complex terms and processes that you might not be familiar with. However, it’s important to understand the differences between some of these terms in case you ever have to deal with them.
Three such terms are foreclosure, short sale, and a Real Estate Owned (REO) home. You’ve likely heard of foreclosure before, but the other two are a bit less common and unfamiliar to most people. While they are all related in some ways, they are all very different.
Here’s what you should know about the differences between these three terms.
Foreclosure is the process that is carried out when a homeowner fails to make their mortgage payments.
If the homeowner isn’t able to pay the debt or sell the home via short sale, which we’ll get to later, then the homeowner forfeits their rights to the property.
The home is then sent to a foreclosure auction. If it is not sold at auction, then the homeowner’s lender will take possession of the property.
Typically, the foreclosure timeline looks something like this:
- Missed mortgage payments
- Lender records a Notice of Default or lis pendens
(depending on state) stating that the borrower has missed payments
- After receiving notice, the borrower has a grace period to work out an agreement with the lender
- Property is sent to auction if the borrower doesn’t make up for the missed payments
- If the property is not sold, it becomes an REO property, also known as a bank-owned property.
While REO and short sale are sometimes part of the foreclosure process, they are not the same thing.
Real Estate Owned, sometimes referred to as a bank-owned property, is simply the term that refers to a property that a bank or other mortgage lender ends up taking ownership of if it is not bought at a foreclosure auction.
This is essentially what happens in the final phase of foreclosure.
As mentioned above, when a homeowner is facing foreclosure, they may be able to work out a short sale agreement with their lender.
Essentially, a short sale is a process by which a home is sold for less than the amount that is owed on the mortgage. It’s like being upside down on an auto loan.
The property owner is basically asking the lender to accept less than is owed. Obviously, this is less than ideal for the lender but is often agreed to in order to avoid having to go through the foreclosure process.
While the lender has to accept less money, they are able to avoid having to go through the trouble of selling the home at auction or figuring out what to do with the property if it isn’t sold.
The Bottom Line
Foreclosure, short sale, and REO are all related to a certain extent in that a short sale and REO may be part of the foreclosure process.
Foreclosure is the process by which a property is repossessed from a homeowner. A short sale is one way that a homeowner may get out of foreclosure. REO is essentially the final step of the foreclosure process.
While it can be confusing to recognize the differences between these terms at first, it is important to understand how they differ from one another in the event that you ever have to face foreclosure. Hopefully, this article gave you a clear understanding of what each of these terms refers to.