People generally pack any type of 'Distressed Property' into the term 'Foreclosure'.  From my experience, I have found that there are 3 categories of Distressed Properties that people generally lump into the term 'Foreclosure,' however, they are all very different!

 

Short Sales: Short sales (pre-foreclosures) are homes that have negative equity.  The Seller generally owes more than what the home is worth.  If a home owner stays current on the payments then they are in no risk of going into foreclosure.  Short sales tend to be the owner attempting to sell the home themselves or with an agent.  If a contract is signed around by the seller and buyer, then the bank needs to approve the shortage of equity.  Many times you will see a short sale situation when an owner has negative equity and has stopped paying the bank.  This is the owner's attempt to sell before going to foreclosure.  The benefit to this is that, while it does have a negative impact on your credit report, it is not nearly as bad as a foreclosure.  Buyers can pick up short sales with a conventional loan, however, it is a very lengthy process to get the banks to sign off on the loss.  I have seen these take anywhere from 2 -12 months to get signed off.

 

Foreclosure: The actual Foreclosure takes place on the courthouse steps.  In Washington it is every Friday.  These are homes that the home owner stopped making payments on and was unable to work out a sale, short sale or loan modification.  The courthouse foreclosure is just like you see in the movies.  Walk in with cash (or, for most people, cashier's checks in multiple denominations), prove that you have the funds and the bidding starts.  Highest bidder gets the house.  An actual foreclosure is devastating on the credit report.  I am told that it will take 7+ years to come off.  Buyers - no conventional loans here - it is either cash or nothing and you are buying without seeing the interior of the home generally.

 

REO's: (Post-foreclosure) This is also commonly clumped into the term 'Foreclosure'.  An REO (Real Estate Owned) is a home that went to auction and for one reason or another was not purchased by anybody.  This home now goes back to the bank and it is the bank's job to sell it.  This is, usually, the last thing a bank wants so they slash the price and hope to sell it quickly.  Banks usually take a big hit if it gets this far.  However, buyers can walk in with a conventional loan, close very quickly AND actually get to see the interior with an inspector in tow!  If I were a buyer, I would be on the lookout for these properties.  I recently saw a home that sold for 870K in 5/07 become and REO and sell for 560K in 3/09 in Kirkland, WA.

 

This is just the tip of the iceberg regarding foreclosures.  This month I wrap up an intense round of classes and will officially be a 'Foreclosure Specialist'.  A title, surprisingly, very few agents hold in Washington.  If you have any questions about 'Foreclosures' or real estate in general I am always available.