Though short sale, foreclosure and REO property sale are all ‘distress sales' but these are different from each other. For example; most short sales are necessarily for properties facing foreclosures but not all foreclosures are necessarily short sales. Similarly, REOs are not short sales but some short sales can be converted into REO. Most people have misconceptions about foreclosure, short sale and REO property sale, and hence find it difficult to invest in the bank owned property that is considered one of the best & safe real estate investment options.
The process that banks and financial institutions use to sell off the mortgaged property to recover a debt is called foreclosure. Generally a foreclosure notice is filed after three or four gaps in the predefined repayment schedule. But, banks or lending institution may decide for foreclosure even because of a single gap in repayment. A foreclosure notice does not prohibit the owners from selling their property as long as they own it. The foreclosure process by the lender is started after getting the consent of the borrower. This agreement between borrower and lender is called a “deed of trust”. If the sale doesn't bring sufficient amount to cover the balance of principal amount and processing fees, mortgagee may file for deficiency judgment.
If none of the received bids is found suitable, bank can decide to hold the property. Investing in foreclosure property is a good option but the fixed price should be reasonable according to the local real estate market.
A short sale of mortgaged property is the process, when the owners sell their property for less than that they actually owe to the lender. In short sale, bank agrees to discount the loan balance considering the financial hardship of the borrower. The short sale is done with the approval of loss mitigation department of the bank. Lender has the right to approve or disapprove a proposed deal. Some short sales leave a deficiency balance to be paid by the borrower in future. By agreeing to short sale, lender saves considerable expenses associated with foreclosure process. Apparently commissions are subtracted from the seller's funds but are added to balance debt amount later on.
REO (REAL ESTATE OWNED)
The term ‘REO' stands for Real Estate Owned for the property that is foreclosed but lender fails to sell it through auction. Ultimately, this property becomes non performing asset in the books of the bank and bank tries to sell it in the open real estate market. REO property is sold on “As Is” basis. Though asking price reflects the rating of the property but it is always good to inspect the site personally.
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