Distressed Properties 101

Ever hear the terms REO, bank-owned, short sale or HUD home? And have you even wondered what the heck all those terms mean? Here are some definitions used to describe common types of distressed properties:

Foreclosure: This refers to the process of a lender taking possession of a property from an owner who isn't paying their mortgage as promised. After the process of foreclosure is completed and the homeowner has left, the property is offered for sale at auction.

REO or bank owned: The terms REO - short for the term "real-estate owned" - and "bank-owned" both refer to properties that are owned by banks. Properties gain that distinction after they go through foreclosure and fail to sell at auction. Adding to the confusion is that REOs and bank-owned properties are often called foreclosures. REOs, or bank-owned properties typically are offered for sale by real-estate agents and sold in "as-is" condition, meaning any repairs will be up to the buyer.

Short sale: This term refers to a property being offered for sale by a homeowner who owes more on their mortgage than their home is worth. Because the seller is asking a bank to accept less than they are owed, the bank is involved in the sale process and ultimately must give final approval to the selling price. That makes short sales some of the most complex and time-consuming real estate transactions.

HUD home: Still with me? This term refers to a home that was originally purchased with a loan insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development, or HUD. The FHA guarantees loans made by private lenders, so if a borrower defaults on an FHA loan, the agency will pay off the lender and take responsibility for the property. At that point, the property becomes a "HUD" home and is offered for sale in much the same way as a bank sells an REO.

Want to learn more about the terms used to describe distressed properties? Check out this glossary.