4 Terms You Must Know As A Buyer

February 28th, 2008 categories: Local Issues, Short Sales & Foreclosures

I attended an investor meeting around a year ago in the area. People were going around the room and talking about transactions that they were working on at the time. A guy spoke up to mention that he was working on a “short sale” transaction. The leader of the meeting interrupted him to take a count of people who understood what a “short sale” was.

At that time there were only around 3 people out of 200 in the room who had ever heard of a “short sale!”

Who would have thought that a year later, we would not only know more about them, but hundreds of the listings on the market would be “short sales?”

I wonder now how many people still don’t know what some of the terms we use mean? Here is a short list to help you understand 4 major types of sales transactions you may see when looking at homes online: (these definitions were taken from a friend over at the San Diego Housing Blog).

Traditional Sale: Owner needs to or wants to sell and has equity. At closing, seller will receive proceeds from the sale.
Distress sale: Owner needs to sell due to personal circumstances. Time is of the essence, they are highly motivated (not selling is not an option).
Short sale: At closing, proceeds from the sale will be insufficient to cover the costs and encumbrances including costs of sale (title, escrow, agent fees) and money owed to lenders, the tax collector, and other lien holders. In these cases, the seller will look to the lender(s) to accept less than what is owed as repayment. The lender may forgive the debt or they may require future repayment of the balance due. This may have credit rating and state income tax implications, but thanks to recent Federal legislation, the forgiven debt might not be subject to Federal income taxation.
REO (or Real Estate Owned): The lender has foreclosed on the property and was unable to sell the home (for an “acceptable” price) at auction. The bank is now the owner, and they are trying to clear the inventory.

Many times, the way to spot an REO is if within the notes of the sale it mentions the the property is “Bank Owned.”

If the notes mention that the home requires “third party approval” it is many times a “short sale,” meaning that not only does the seller have to approve the transaction but the bank will also. I will speak more about this in future posts, but if the bank has not approved the price of the short sale you could very well be spinning your wheels even if the owner accepts the deal.

Not everything that sparkles is gold.