I work with a lot of buyers and I always get asked, “What are all these crazy foreclosure terms and what do they mean?”

To help make sense of all these terms, you can divide them up into three categories.

1. Pre-foreclosure
Pre-foreclosure homes are the ones in the process of foreclosure, but have not been auctioned off. Owners often try to sell the properties because they owe more on their mortgage than what the home is currently worth. This is called a ”Short Sale” although the process is far longer to undertake than what the term implies, as it is usually complicated and a slow process that can take anywhere from 3 months to a year to complete. However buyers are given the chance to inspect the home prior to purchasing, whereas it’s not always the case when buying in other stages of foreclosure.

2. Foreclosure
The second category is the public auction at a foreclosure sale. Homes in this stage are well-priced, but also come with a few challenges to buy. These homes are not available for inspection and buyers may later discover the property needs lots of repairs to make it suitable for living. Many of these homes are bought by investors who have experience working with these types of homes, or the home may be taken back as an REO by the foreclosing lender or bank.

3. Real Estate Owned
The third category is an REO or “Real Estate Owned” property that’s been taken over by the bank. Although homes in this stage sometimes do not offer buyers the best price, buyers can generally perform thorough inspections, and many times the banks have made some repairs before putting the property up for sale. The bank then sells the homes “as is” and will not pay for any cosmetic issues, although they will often pay for some repairs that are health or safety issues. One of the key issues here is reserving enough money as a cushion to pay for unexpected repairs.

This process can be very confusing and I hope this simple explanation helps.

Homebuyers, have you been hesitant to consider purchasing one of these types of homes? What are your biggest questions/concerns? Leave me a comment below and I’ll be glad to answer any question you may have.



Posted by:  Rick Smith