A Short Sale is a sale that pays the mortgage holder less than the loan amount owed on the property – therefore the lender is taking a loss or a "short" on the mortgage. This kind of sale only applies when a seller has a true hardship, such as a loss of their job or something equivalent. Because the seller still owns the property the seller would put their home on the market based on what the market would bear. Once an offer is obtained the seller then supplies the bank with the offer and several forms required to show their hardship. The bank reviews the offer and the hardship, and depending on the lender, the approval process can take from 2 to 6 months (sometimes longer) from the time it was submitted. There is no guarantee that the bank will allow the hardship or the short, however, thousands of them are done monthly across the nation. Very often the listing price that an agent places on the property is a great, low price – but where you save money on the price, you in turn pay for that low price with patience.
An REO (Real Estate Owned) is a bank-owned property. These properties are typically homes that have gone through foreclosure and are now owned by the bank. Often these properties are good deals and the bank (about 50% of them) paints, carpets, and cleans them up prior to putting them on the market. The amount of work they put into it depends on how much of a loss they have suffered from taking the property back through foreclosure. A home inspection is always recommended on any REO property (and for that matter, Short Sales as well) as neither the bank nor you know how the prior owner treated the property. Remember, when buying this type of property they are often sold in their current "as is" condition. Also, banks often take extra time to respond to offers because more than one person at the bank is required to approve it.
If you are a homeowner who might be thinking of short selling your home, or are facing a possible foreclosure, be aware that there could very well be a taxable event on the difference between what your home sells for and the amount that is owed. As an example, if you owe the bank $ 500,000 on your mortgage, but your home sells for $ 400,000 – you could be taxed on the $ 100,000 difference. Depending on your tax bracket, this could easily mean a tax liability of $ 25,000 or more. Be sure to consult with a real estate tax professional before proceeding.