A distressed property is a property in which the borrower (home owner) begins missing monthly mortgage payments and has defaulted on his promissory note. For real estate purposes short sales, foreclosures, and REOs qualify as distressed properties. Distressed properties typically sell for a price below fair market value.
Short Sale
A short sale is any sale of real estate in which the proceeds from the sale of the property are less than the outstanding debt on the property. A short sale occurs when the debt holder agrees to release all liens against the property in exchange for an amount less than the total amount owed by the owner. Short sales are one alternative to foreclosure and are preferred by home owners because the resulting effect on owner credit is less negative than being foreclosed on.
Foreclosures
A foreclosure is actually a legal process that occurs whenever a lender, usually a bank, attempts to recover the balance of a loan from a borrower (homeowner) who has ceased paying his or her debt. At settlement buyers sign both a promissory note and a mortgage. The promissory note is the contract that governs the terms of borrowed money and it includes things like the amount being borrowed, the interest rate and the repayment schedule. The mortgage is the document that puts the property being purchased as collateral for repayment of the loan. If the terms of the promissory note are not met the lender can use the mortgage to foreclose on the property and gain possession. Once the lender has possession of the foreclosed property the lender will usually sell the property and keep the proceeds from the sale.
REO
REO or real estate owned refers to foreclosed properties that are owned by banks. Once a borrower misses one or more monthly mortgage payments the lender will assess the amount of equity in the property and decide if a short sale is appropriate. If the property does not sell as a short sale and subsequently does not sell at sheriffs sale the lender retakes possession of the property and it becomes part of the banks REO inventory.