Thursday, September 1, 2011

Clearing Up Terms About Distressed Properties


Foreclosure is the legal and professional proceeding in which a lender, obtains a court ordered termination of a mortgagor's equitible right of redemption. As long as this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption.

The foreclosure process as applied to residential mortgage loans is a lender selling or repossessing a parcel after the owner has failed to comply with an agreement between the lender and borrower. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs.


A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, lender agrees to discount a balance due to an economic or financial hardship. This negotiation is all done through communication with a bank’s loss mitigation or workout department.

The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. A deficiency balance will remain as a potential liability for the Mortgagor / Borrower.


Real estate owned or REO is a class of property owned by a lender after an unsuccessful sale at a foreclosure sale As soon as the bank repossesses the property, it is listed on their books as REO – Real Estate Owned – and is categorized as an asset (non-performing).

After repossession and the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public. Generally speaking, bank REO properties are in poor shape in terms of repairs and maintenance, however, purchasers will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.

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