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Customer Question: What is the Difference Between a Potential Short Sale and Bank Owned

What is the Difference Between a Potential Short Sale and Bank Owned?

We deal with a lot of customers and we get a lot of the same questions. This is one that’s asked often.

A bank-owned/REO (Real Estate Owned) property is one that has already been foreclosed on by the bank.  The price is what they determined the market value to be and then it’s decreased by whatever formula that particular banks uses to procure a quick sale because they’re not in the business of owning real estate.  The price is negotiable, but if it’s Fannie Mae or Freddie Mac (both government owned banks) they typically will not give more than a few percent off the asking price.

A short-sale is a whole different animal.  The price you see on those can be rather arbitrary unless it has been approved by the 3rd party the holds the lien on the property for the mortgage.  Basically what happens is a property has a mortgage on it that is more than what the property is worth and the owner, or seller, puts it on the market for less than the amount they owe and attempts to generate an offer.

Once an offer is received it’s passed on to the bank for approval to determine if they’re willing to take less than the loan amount to get the property off their books and avoid a potential foreclosure.  This can be a time consuming process, sometimes taking more than 6 months.  Our experience is that the best deal come from short sales, but it takes a lot of patience.  Most often the outcome is a counter proposal from the bank.  Example, seller owes $200k, property is worth $150k, buyer offers $125k.  After going through their review process the bank will either completely reject (unlikely), accept and add stipulations, or counter, probably closer to the $150k value.

On foreclosures, banks can be pretty aggressive in setting their prices. I’ve seen bidding wars on several properties with my buyers. Sometimes the bank will say present your best offer by a certain deadline and then select the best. On short sales, it’s a bit like of Wild West. Since there is no set price, only what the seller and real estate are guessing the bank will accept, many of my buyers make lower offers. Again, this is not a quick turn-around game. Short sales can take from a few days for a bank response to months. Many buyers will make multiple short sale offers on different properties.

I’ve tried to make short sales and bank owned homes a little clearer here, but it can be pretty complicated. I work with these everyday. I would be happy to talk with you about it more. Give me, David, a call at 386-566-4169 and I’ll be happy to answer any other questions you might have.

David Byrne is a Daytona Beach real estate real estate agent who specializes in condos, homes, short sales and foreclosures.


  1. Darrell Jones says

    David I put a contract on a property that is listed at $389,900 and ays potential short sale. I offered $359,900 and all parties signed in agreement. The bak made a counter offer of $432,000, which I feel is rediculous. I am willing to offer the listing price, but since it is listed as a potential short sale and not a short sale do I have any leverage. Can they be held to the listing price if all else fails?

  2. Darrell,

    There is not much you can do in this situation accept counter with the price you are willing to pay. A potential short-sale is just that. Until it closes and the bank has allowed the owner to sell short of what they owe it is considered a potential short-sale. Unfortunately we find often find the asking price on short-sale listings are arbitrary unless the bank has already approved a price. Many listing agents will use the strategy of pricing the listing around or under current market value to get an offer to take to the bank. Most banks will not consider a short-sale without an offer in hand.

    There is no way to make the bank take less than they are willing to and unfortunately it does not necessarily reflect current market value, rather a number that they feel is necessary in order to release the loan.

    The most likely scenario is that the listing agent will now list the property at the approved $432k as an approved short-sale price. Even this does not necessarily guarantee that they will take this number at a later date as most approvals expire (often within 30 days).

    Best of luck,


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