The Three Stages of Foreclosure: Short Sale, Auction, and Real Estate Owned (REO)

Real Estate Agent with Colonial Properties LLC

Short Sales occur when a property owner needs to sell their home but owes the bank(s) more than the current market value of the house.  This is often referred to as being "upside down" on the mortgage.  The property owner may negotiate with the mortgage note holder(s) to sell the home for less, and to have the bank pay for all closing costs, including commissions.  This allows the owner to get out of the property without bringing any money to the closing table and allows the bank to avoid a costly foreclosure process.  Real Estate Agents partnered with third party negotiators can guide their sellers through this sometimes lengthy (up to three months) process and can enable their buyer clients to get an excellent deal on a new home.

Auctions are held once a bank has officially taken over the property by foreclosure. Properties sold at auction require much due diligence on the part of potential buyers, who may inherit all liens, defects and possibly pre-existing tenants.  Many properties that get to this phase are in rough shape due to lack of upkeep, negligence or outright destruction by the prior owners and in some cases, the potential buyer is unable to view the inside of the property until after the closing.  Real Estate Agents are cautioned to beware representing Buyers in this phase because of the large risk associated with this type of purchase.

Real Estate Owned or "REO" properties are homes that went to auction, but were bought back by the bank as the highest bidder. These properties may also be in rough shape, but the new owner (bank) is required to clear all liens and other encumbrances in order to deliver clear title at the closing.  REOs are sold "As Is" so once again the buyer must be diligent in their inspection process.  Typically offers, once accepted, move directly to the P&S phase and require buyers to sign the seller's P&S and Addendums without modification and within 24-48 hours.  Real Estate Agents will find that for buyers willing to invest in a home needing repair, REOs can be a solid investment for their clients.

Lisa Maxwell, ABR, Realtor®