Distressed Sales - Overview

u may remember watching an old movie where the widow-lady and her four little kids are mercilessly tossed out of their home and into the street as the banker (usually complete with handlebar mustache) nails a sign on the front door of the house. She couldn't maintain the house payments, so the bank took the house away from her. While it doesn't happen quite that way, essentially, what you saw on the screen was a foreclosure, a la Hollywood.

What Are Distressed Sales?

Distressed sales are situations that involve the quick sale of an asset(s), even at a loss, in order to satisfy the financial encumbrance against it. When it comes to real estate, there are different types of distressed sales, including foreclosures, short sales and real-estate-owned (REO) sales. All of these names imply the same thing, but the terms themselves have different meanings. The same, only different, is an apropos term in this case.

It is important to understand the difference between these terms before you head off into charted waters. Many people get into trouble because they don't understand that even though most short sales are foreclosures, not all foreclosures are short sales. Also, REOs are not short sales, but some short sales gone awry can end up as REOs.

So, let's unravel the mystery.


A home foreclosure happens when a "notice of default" has been filed against the owners in the public records. That means that the owners stopped making mortgage payments and the lender has advised that unless the payments are brought up-to-date, the property will be repossessed and auctioned to the highest bidder. Although there may be other reasons for a foreclosure, the most common is payment default. Not all homes that fall into foreclosure end up on the block because the owner has the opportunity to bring payments current within a specified period, determined by the place in which the home is located. It varies from state to state.

What is important to know in the case of a foreclosure is that, if you determine you want to invest in a foreclosure, you are required by law to comply with the Home Equity Sales Act. This Act includes the requirement that sellers who are in foreclosure have the right to cancel a transaction within five days of commitment. Investors MUST give sellers notice of that information, as well as other requirements within the Act. If the investor fails to do so, the penalties are severe. Part of the penalty is a provision that the seller (the person in foreclosure) has the right to cancel the sale of the property up to two years after the closing of the sale! It is important that, when considering investing in a foreclosure property, a real estate lawyer is consulted.

Short Sales

A short sale happens when a property is sold between the time it goes into foreclosure and the time it is to be auctioned. In a situation like this, the seller must agree to a price lower than what is owed on the property. Typically, investors are able to buy the home for less since they are not paying out back payments on loans, nor are they actually paying out the existing loan. It is not necessary that a home be in foreclosure for a short sale to take place. Sometimes a situation arises where the owner of the home just wants out and the buyer, who wants to live in that home, is able to buy it below what is owed. It's a great financial move.


REO (real-estate-owned) is property that has been foreclosed upon and is now owned by the lender. The bank ends up owning the property if it isn't sold at public auction for enough money to cover what is owing. In an REO, the seller is out of the picture, so there isn't the emotional aspect to deal with in the transaction. In an REO, the people involved in the negotiation are the investor, his/her agent, the bank and the bank's agent.