Bank Owned vs. Short Sale – What’s the Difference?

I’ve been looking at a lot of bank owned property lately.  Why? you ask?  Well, for one thing, there are A LOT more of them these days.  We don’t really have a way in our MLS system to differentiate between Bank Owned, Short Sale or regular, old fashioned sellers – I hear that some of my peers in other parts of the country can do that.  Anyway, as I’ve written before about short sales, I generally try to stay away from those types of sales feeling that it really isn’t the best situation in which to represent a buyer.

Short Sales in a Nutshell

So, back on target, what’s the difference?  Short sale is the process a homeowner attempts to go through to prevent foreclosure.  It’s where they ask the lender to forgive the debt and allows them to sell the property for less than what is owed.  The sale is approved by the lender (or lenders if there are two), thus you’ll often see the phrase “subject to 3rd party approval” in the listing. 

In these situations, the property owners are still living in the property – they’re not always happy about their situation and they can sometimes take out their frustration on the property.  When purchasing a short sale, you accept it in the condition it’s in AS OF SETTLEMENT.  Along with the other shortcomings listed out in my previous post, it just boils down to a huge amount of risk and time on the buyer’s part.

REO – Real Estate Owned

How about REO – what is that?  REO stands for Real Estate Owned.  These are properties that have already been foreclosed on, so the bank is now the owner/seller.  The occupants are somehow removed from the picture, but sometimes they leave their stuff behind – sometimes LOTS of stuff.   The bank now wants to sell the property hoping for fair market value.  However, sometimes, due to the behavior described above, the properties are distressed and there are deals to be made.

Generally when purchasing REO, you still give up many of your rights as a buyer, but it’s a much faster process and the property condition/situation is more controlled.  Generally they will allow an inspection but are less interested in dealing with credits or any repairs.

Here are some photos from an REO property I saw last night with a client.  It’s so sad to see some of these properties and the condition they’ve deteriorated to.

McLean Day 008

This is a shed that was to be built out back – the washer/dryer are in there although I’d bet they are not working.  Next to them is a sink base w/cabinets.  It’s funny that there is a door on the structure, but sad.

McLean Day 010

This is what the rest of the back yard looks like – furniture, trash, clothing, food, construction materials, etc…  What a mess.

So, sometimes REO can be a good deal IF the bank is aware of what they’ve got and if the buyer is prepared to deal with it!

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6 comments on “Bank Owned vs. Short Sale – What’s the Difference?

  1. Cyndee Haydon

    Jennifer – great post on explaining the difference and the pictures really help prepare those buyers wanting foreclosures they are likely to see.

  2. Jonathan Christopher

    I have purchased both short sales and REOs and I have found some really good deals. I have found that I can typically get a much better discount from a short sale but it can be time consuming. Either way there are great deals out there for interested buyers.
    Jonathan Christopher of Short Sale Way

  3. Susan Hilton - Texas Aggie Realtor

    I agree – there is a big difference. In one case (the short sale) you have a decision that has to be made by a seller and a TERRIBLY OVER WORKED negotiator who may not get to your file for months.

    The REO property is being handled by people who know what they are doing, know what the property is worth and know what they will take AND can make a decision NOW.

    SELL THE REOs!

  4. Short Sale Pro

    I think as foreclosure rise and lenders take back more inventory, you will find that the REO’s will be the big profit deals. I say this because banks will be forced to lower their prices to sell off of the houses they picked.

    They will be the truly motivated seller.

    Also one question,why do you feel like a short sale isn’t representing the buyer fairly? It seems like if the buyer get the house at a price they feel is a good deal according to comps, that it would be the ideal deals for a buyer.

    I will wait for your response.

    Nice blog by the way.

    Donte from NC

  5. Jennifer

    Thanks for your comments, Donte. The reason I feel short sales aren’t great deals for buyers are:
    1) LONG response time ties the buyer up from pursuing other opportunities
    2) often times disgruntled occupants are still in the property and we are now seeing contracts stating that the property conveys in as-is condition as of the date of SETTLEMENT – so whatever destruction the property endures, it’s the buyer’s tough luck
    3) Here in Virginia, our settlement dates are strict times – in other words, it’s not “on or about” – the settlement date IS the settlement date. Often times in a short sale situation, the buyer shows up at the settlement, loan funded, ready to sign and no seller or seller representation to be found. I’ve heard of some of these going 30-60 days without reason given…

    For these 3 reasons and I’m sure a few others, I think as you state, the REO is the place to be.

    Thanks for reading!
    Jennifer

  6. Jean

    I have an offer in on a short sale and even though I was informed that it would require patience on my part it is very frustrating! I’m coming up on 3 months and during that time I’ve lost out on 5 other properties to higher bids. Definitely fierce competition for these “bargain priced” homes here where I live. I’ve found 2 other bank owned properties and wanting to find out a bit more about the difference between the 2 is what brought me here. I’ve had my hope refreshed…thank you! If I can get an offer in on one of these other 2, maybe it won’t take another 3+ months.

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