What's the difference between a SHORT SALE and an REO Bank-Owned Home?

A short sale is when a homeowner sells his house for less than the mortgage loan on the house, at a loss to the mortgage lender. For example, Mr. Johnson may have purchased a home in 2006 at the height of the real estate market values and took out a mortgage loan for $400,000. He can no longer make the loan payments so he needs to sell the house. However, he can only sell it for $300,000 because that is today's current market value. So the bank agrees to accept only $300,000 as full payment for the $400,000 loan. In this case, they agree to take a $100,000 loss.

Why would a mortgage lender agree to take such a big loss? The main reason is because if they don't approve the short sale, and the homeowner allows the house to go into foreclosure, then the lender (or bank) will take an even bigger loss.

An REO is a foreclosed home that the bank or lender has taken back from the home owner. REO stands for Real Estate Owned, because it's now handled by the bank's REO department. Sometimes they are called bank-owned homes, or mortgage lender foreclosures.

Short sales do not necessarily impact the neighborhood values directly; they are merely reflective of the current market conditions. They are usually owner-occupied and are being maintained because the home owner cares about their property.

Foreclosed houses, also known as bank-owed or REOs, bring down the value of the entire neighborhood. Most of them are vacant and therefore vandalized. And because the bank owns the house, and the bank is not good at property management, the bank fails to take care of the house. It deteriorates and that brings down the value of all the houses on that street.

Worse, if there are multiple REO homes on a street, the value of that street drops significantly because many owner-occupied buyers will steer away from that as a sign of a bad neighborhood.

Regina P. Brown
Broker, Realtor®, e-Pro
Author of eBook "Stop Foreclosure Fast: Solutions to Save your House"
Author of forthcoming book, "Virtual Office Guide for Business Professionals: Work & Profit from Home"
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Text copyright © 2009 R.P. Brown, All Rights Reserved