What is a Short Sale?

For owners who can no longer afford to keep

Mortgage payments current, an alternative to

Bankruptcy or foreclosure proceedings includes

short sale. A short sale in real estate occurs,

when the outstanding obligations (loans) against

a property are greater than what the property can

be sold for. The lender agrees to accept a

discounted payoff (less than the total amount

due), meaning the lender will release the lien that

is secured to the property upon receipt of less

money than is actually owed in hopes of avoiding

or mitigating an impending loss.

If a property is sold under a short sale, the lender

may require the buyer to make up the difference,

either through a personal obligation or a

collection. Also, the IRS may consider debt

forgiveness as income so a seller may be faced

with tax ramifications.

When the short sale enters escrow, it is likely to

include restrictions from the lender on closing

costs and the payoff amounts to the lenders and

creditors. Throughout the escrow process, the

seller and real estate agent should be proactive

about the numbers that the lender will see. Take

care to include every possible expense in the

Seller’s net sheet, and be aware of the bottom

line as the process unfolds.

Foreclosure is the process whereby the lender

takes possession of the property. When a

homeowner fails to make the payments on

his/her mortgage, the lender can begin

foreclosure proceedings. This is a very specific

legal process with set timelines and outcomes. In

a short sale situation, the homeowner's name is

still on title of the property and they are the

official owners who are trying to sell the property.

In a foreclosure, the lender takes possession of

the house and as a result, the homeowner is no

longer a party in the sale.

Foreclosure properties are auctioned at a

Trustee Sale at the court house in the county

where the property is located. Foreclosure

properties must be paid for in full at the time of

the auction.

Because these transactions do not go through

the same escrow process as regular sales,

typically only seasoned investors will purchase

property at a Trustee Sale. This is due to

the risks and potential problems that are

normally investigated and cleared during escrow.

Problems may include: title problems, superior

loan pay offs, IRS liens, tenants or owners still

occupying the property, and/or structural

problems. The price may seem good at

auction (priced well below other houses in the

neighborhood), but costs and risks may come

after taking title.

Real Estate Owned (REO)

Real Estate Owned (REO) is a term frequently

used by lending institutions as applied to

ownership of real property acquired for

investment or as a result of foreclosure.

REO is property owned by a lender, usually a

bank, after an unsuccessful sale at a foreclosure

auction (Trustee Sale). The bank will then go

through the process of trying to sell the property

on its own. It will try to remove some of the liens

and other expenses on the home, and then try to

sell it through the use of real estate agents.

If the buyer of an REO is making any moving

plans, they should note that a closing delay could

occur. The bank, as the seller, will set the

pace of the transaction. This is especially

true in the last days prior to closing.

Our experienced REO escrow officers

are excellent resources for

information and they understand

the best ways to move an

REO escrow to a

timely, trouble-free

close.