There are so many different real estate terms flying around that many people need clarification. Common victims of this are short sales and bank-owned properties, and many people assume these are the same things, but they differ—the difference between short sale vs. bank-owned:

Bank-Owned 

Bank-Owned homes are also referred to as REO (real estate-owned) properties. These houses have been foreclosed on and repossessed by the lender (bank). It means that the owner defaulted on their loan, and the bank filed a Notice of Default. Following the allowed repayment period, upon the homeowner’s failure to repay, the bank served a notice of foreclosure and took possession of the property. Suppose a sale lists a property as bank-owned. In that case, that home is a foreclosure that the financial institution sells to recoup their losses from the previous owner’s unpaid loan. An asset manager employed by the bank typically facilitates these sales. 

Short Sale

By contrast, a short sale is sold by the person who owes money to the bank. Typically, short sales are utilized when the homeowner needs to sell for urgent financial reasons. One common culprit is that they are behind on their mortgage payments and are interested in selling before a foreclosure can severely impact their credit. It is a perfectly legal sale. The lender will approve a short sale if the home value and mortgage amount gap are insignificant. It is because they would recover most of the money they owe than have to foreclose on the home and suffer the loss of facilitating the sale themselves.

With that, the bank is not a party in the short sale. After they approve the home to be listed as a short sale, they are removed from the transaction entirely. It is important to note that the term “short sale” indicates that the homeowner owes more money on the mortgage than the price of the property as listed. For the short sale to be authorized, the lender has to agree to take the loss from the gap between the home’s sale price and the remaining amount on the mortgage. It allows the bank’s lien on the house to be released and will sell the property with a “free and clear” title. 

Final Thoughts

Suppose you will be involved in a transaction involving one of these property types. In that case, it is essential to know the difference between short sale vs. bank-owned. Special rules and regulations apply to each, and surprisingly enough, not all real estate agents know the difference. Therefore, navigating these transactions recommend using an agent with short sale and bank-owned property experience. Suppose you decide to do it yourself without a realtor. In that case, you must do plenty of research and double-check your sources throughout the entire process.