In the current strong market for real estate, distress sales have dropped to a minimal level in the South Bay and most areas. Investors snap them up when prices are right. Nonetheless, now and then I'm asked what the principal types of distress sale terms mean. Here's a refresher:
First, a link to an article from my real estate blog back in 2011 that gives an overview of the different types of distress sales:
In a short sale, the owner offers the home for sale through a Realtor and the bank, if they approve an offer, accepts less than they are owed, forgiving the rest of the debt.
In pre-foreclosure, the bank has given the owner a Notice of Default, saying in effect “pay up or we will sell your home in a foreclosure sale. Some owners list their homes after receiving a Notice of Default, but they are typically in denial and won’t actually sell their home, but if they do it’s typically for cash or a very fast loan. [expansion on this topic: Here's the thing about pre-foreclosures: It's just a term meaning the homeowner has been served a Notice of Default (that's a 90-day waiting period notice in California). If the homeowner, considering this fact, decides to sell their home, then it comes out on the MLS as a Notice of Default sale. All the rest (those who don't list their homes) are just that: owners very late on their mortgages who have NOT decided to sell. So the fact that eager websites like to tell us how much trouble these people are in doesn't translate into those homes actually being for sale, and the lender has no standing to sell them.]
Foreclosure is when the Notice of Default has matured and the bank has scheduled a foreclosure sale (the ones you hear about on the “courthouse steps”). At this point, you have an angry seller who is still probably in denial but might sell for cash (there’s no time for buyer to get a loan).
Foreclosed or Real Estate Owned (REO) properties have been foreclosed by the lender and taken into their ownership. The foreclosure is over, now the bank just owns the home.
And thank God most of these are over! -David