In this day and age, it is entirely likely that you will come across a financially distressed property during your home-buying adventure. There are some different terms and guidelines for these homes, and if you're in the market, it might be a good idea to familiarize yourself with them.
Short Sale, or pre-foreclosure: This is the first step when a buyer is facing problems with their lenders. In this case, a borrower is in default of their mortgage and the lender is accepting reduced offers, in lieu of undergoing the foreclosure process. It saves the lender time and in turn, money, to get a qualified buyer into the home in place of the delinquent owner.
It can also benefit the buyer, because the lender will often accept a reduced price in order to avoid foreclosure. One big disadvantage of short sales though, is the extended period of time it takes to get a response from the bank, sometimes in excess of 90 days, just to find out if they accept your offer or not. This is because the offer must go through a loss mitigation department which weighs the offer against any losses the bank has incurred.
REO: Also known as lender- or bank-owned, property, this is when the borrower has lost possession of their home and the lender is the new title holder. At this point, they have listed the property with a real estate agent and are selling the home at fair market value in anattempt to recoup their losses.
These homes are often sold in "as-is" condition, but the price should reflect any problems the home may have. You may see a few in rough shape, but it's about potential and in the REO market, there is plenty of that. You can also expect quicker response times than with short sales because the property has already been gone through loss mitigation and the price has been established.
Hopefully this helps any of you that are in the market for a new home and if you have any more questions, I am Carol Wolfe and nobody does it better.
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