Short Sale vs Bank Owned (REO) – What's the Difference?

There are many confusing terms out there today regarding “distressed properties.” I’d like to take a moment to layout the different terms used in today’s real estate marketplace, such as Short Sale (or Pre-Foreclosure), REO, etc. to help you understand what you are seeing. Many Realtors use some of these terms more for marketing purposes because the general public associates those certain words with good value. This is not always the case. Each property should be evaluated on a case by case basis with an experienced broker familiar with the area, values, and various additional requirements and procedures.

What is a Short Sale?

A short sale occurs when a lender agrees to take less than the full loan payoff for an owner’s property. In most cases, the owner is in default and is not making their payments for whatever reason.

Short sales, in most circumstances, are the first step to avoid foreclosure. Although the lender(s) will recover less than the total loan amount in a short sale, they may prefer this in lieu of foreclosure. The costs of foreclosing on a property may be more than the bank’s loss by taking a short sale. Also, the property may not sell at auction and then the bank would be forced to take it back as an REO (Real Estate Owned) property, which then they would have to maintain, list, and sell with an REO broker.

Short sales are very complicated and the outcome is not guaranteed. There are so many variables that I cannot even cover everything in a couple paragraphs. The bank (lender) is not obligated to take a short sale, and in most cases, the process to get one approved is a cumbersome and time consuming task for the buyer, seller, and the realtors. Sometimes these requests are not approved by the bank and the property ends up going to foreclosure anyway. Although, lately, some of the larger mainland financial institutions like Bank of America have taken great steps toward improving the process.

Each bank evaluates each individual request on a case by case basis. Not only do the banks consider the borrower’s personal and financial situation, but they also consider an appraisal of the property, market conditions, the bank’s financial situation, their current portfolio, and in many cases, have to consult with an outside investor who purchased the loan at some point.

Given all of these varying circumstances, you can imagine why this process takes so long. Although many buyers do not want to wait out this long process and deal with the uncertainty, if a short sale is approved, it can be below market (depending on the bank appraisal). If you are considering selling your home as a short sale, please contact me. Depending on the types of loan(s) you have and your financial situation, it may or may not be the best option for you.

What is an REO?

REO is an abbreviation for Real Estate Owned properties.

If no one purchases the property at the courthouse, then the property becomes an REO, owned by the bank. A home that has been “foreclosed” and has become a bank owned property can then be listed by a realtor who is hired by the bank to market and sell the property.

MLS 370851

Kahana Ridge, 2 Hibiscus Place (MLS# 370851)

To sell the house as quickly as possible the lender will remove any liens on title, and clear any other issues that may slow down the sale of the property. Generally, lenders are very motivated to sell these properties, as they are in the business of lending money, not owning real estate. REOs tie up their capital reserves and hamper their ability to lend money. Also, the management of these properties can become very costly. This is the best opportunity to find a good deal.

I have two great REO properties listed for sale in upper West Maui:

  • Kahana Ridge, 2 Hibiscus Place (MLS# 370851), 3 bed, 3 bath
  • Villas at Kahana Ridge Apt 332 (MLS# 371268), 3 bed, 2 bath w/loft


Put My Experience to Work For You

My family and I feel very blessed to have called West Maui home for over 25 years. I have been fortunate to have been assisting Maui buyers and sellers here for well over a decade – you can put my experience to work for you too.

Greg Smith - West Maui

Let me help you find the trail to your next property (Greg Smith – West Maui)

If you would like to arrange to see this or any other West Maui properties, please don’t hesitate to contact me.


Greg Smith

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