Hi Juan:

SHORT SALE
A Short Sale is where the net proceeds of the sale will not satisfy the current payoff amount of the 1st and/or 2nd mortgage, if applicable, and the resulting selling costs. Typically in these cases there are also significant unpaid property taxes.

A Buyer's offer is typically made contingent that the Lender provides written approval of the Short Sale. Once this happens the Buyer's contingency timelines start. The Seller does not work with the bank directly, the Seller’s agent does, and I can tell you that use of the word “work” is an over statement. Yes, a large package has to be submitted to the bank to support a case of hardship; however, there’s not much back and forth status between the Seller’s agent and the Lender, which can be extremely frustrating for a Buyer and the agent that represents the Seller. Expect a 60 to 90+ day transaction period as the Lender(s) determines whether the offer is sufficient to approve. Normally, the property stays on the MLS until the Short Sale Approval is granted, so a better offer may sneak in. Short Sales are hard on everyone involved, in my opinion.

REAL ESTATE OWNED (REO) a.k.a "Bank Owned"
Once the lender forecloses on a home an attempt is made to sell it on the steps of the County Courthouse. If there are no buyers the lender becomes the owner, along with all the responsibility of the property taxes, utility bills, property insurance, and the risks of having a non-inhabited building. These are typically listed quickly (depending on physical condition) by an agent on the MLS working with the bank. In my experience, these are a better deal than Short Sales because once you submit your offer you normally get a response within 2 to 7 days.

In my opinion, the REO is the better way to go, but don’t overlook the "non-distressed" homes out there. With the extra supply of Short Sale/REO homes on the market Sellers are feeling the pressure to be competitive. Chances are that you can find a home in better shape for close to the price of the Short Sale/REO.

I hope this helped. Good luck in your search.

Best, Steve

When a property is sold short of what is owed on it.
This has to, of course, be approved by the lender and there are indications given to them that it may eventually become a foreclosed property ( behind on payments, etc).
Your credit score will be affected if you do a short sale but not to the degree that a foreclosure would be. A buyer has to have a good deal of patience as their offer may or may not be accepted and there is a possible long time period for the confirmation.