Buying Distressed Property: A Data-Driven Guide to REO vs. Short Sales

For home buyers in today's market, distressed properties—namely bank-owned (REO) and short sales—present a significant opportunity for value, but require a distinct strategy. Data from key markets like Las Vegas, Phoenix, and San Diego indicates these sales can comprise over half of all transactions. This guide analyzes the critical differences, pricing trends, and negotiation tactics to help you make an informed decision.

What is the Core Difference Between an REO and a Short Sale?

The fundamental distinction lies in the stage of the foreclosure process and who approves the sale. A short sale occurs before the bank repossesses the home. The homeowner still holds the title, but the lender must agree to accept a sale price that is "short" of the outstanding mortgage balance. This process requires third-party approval, making it complex and often lengthy.

In contrast, an REO (Real Estate Owned) property is one that the bank has already repossessed through foreclosure. The bank now holds the title and sells the property directly. As the seller, the bank can approve an offer without a third party, typically leading to a more straightforward, though not always faster, transaction.

How Do REO and Short Sale Prices Compare to Market Value?

Both types of properties are priced below market value, but the discount drivers differ. Based on market assessments from the last two years, REO properties are often priced aggressively to liquidate the bank's asset quickly. They represent a clear discount but may require significant repairs.

Short sales are priced based on the homeowner's financial hardship and the outstanding loan amount. While also below market value, the final price is subject to lengthy bank negotiations. The table below illustrates typical price differentials:

What Are the Primary Challenges and Timelines for Buyers?

Understanding the timeline and potential hurdles is crucial for setting expectations.

• Short Sale Challenges: The primary challenge is time. The lender must review a extensive financial package from the seller to prove hardship, and may even counter the buyer's offer. This process can take three to six months or longer, with no guarantee of approval. Based on our experience assessment, a significant number of agreed-upon short sales ultimately fall through due to lender rejection or seller withdrawal.

• REO Property Challenges: While banks can approve offers more quickly, the sale is almost always "as-is." This means the bank will typically not pay for repairs identified in an inspection. Furthermore, REO transactions can involve more bureaucratic red tape from the bank's asset management department, potentially delaying closing by several weeks compared to a traditional sale.

What Practical Steps Should a Buyer Take?

If you are considering a distressed property, a disciplined approach is essential.

1. Secure Financing Pre-Approval: Sellers, especially banks, prioritize offers with strong financial backing. A pre-approval letter from a direct lender is a necessity, not an option.
2. Work with a Specialized Agent: Engage a real estate agent with proven experience in distressed sales. Their understanding of the specific paperwork and negotiation protocols is invaluable.
3. Conduct Thorough Due Diligence: Never waive the inspection contingency. For an REO property, budget for potential repair costs. For a short sale, be prepared for a long waiting period and have a backup housing plan.
4. Practice Patience in Negotiations: Lowball offers are often automatically rejected by automated systems. Submit a competitive offer based on comparable sales and be prepared for a counter-offer rather than an immediate acceptance.

Purchasing a distressed property can be a rewarding path to homeownership, but it demands patience, specialized expertise, and a clear understanding of the risks involved. By focusing on the data and preparing for the unique challenges of each sale type, you can navigate this complex segment of the market with greater confidence.