REO vs. Foreclosure
Foreclosure is the process that leads to an auction; an REO is the property a lender owns after that auction fails to produce a buyer. A short sale is a different route entirely — one that happens before foreclosure, with the homeowner still involved.
The three situations, side by side
| Short sale | Foreclosure auction | REO | |
|---|---|---|---|
| When it happens | Before foreclosure | The auction stage | After the auction fails |
| Who the seller is | The homeowner, with lender approval | The foreclosing lender | The lender or its asset manager |
| How the price is set | Offer negotiated with lender approval | Lender's opening bid, then bidding | Lender's asking price and terms |
| Condition | Varies; homeowner may still occupy | Varies; buyer bids with limited access | Often poor, with deferred maintenance |
| Main buyer concern | Waiting for lender approval | Bidding without inspections | Repairs, contract terms and title |
How the sequence works
When a borrower falls behind, the lender looks at the property's equity, often through a broker's price opinion or an appraisal. If the homeowner requests a short sale, the lender may consider it based on that figure. If not, foreclosure continues.
At the auction, the lender typically sets the opening bid at least at the outstanding loan amount. If no one bids, the lender repossesses the property and holds it as REO. Only then does it become a bank-owned listing.
More on what an REO is · How to buy one
Why buyers care about the difference
In a short sale you are waiting on a lender's decision while the homeowner remains involved. At an auction you need to be ready to buy on the spot, usually without a normal inspection period. In an REO sale you deal with the lender or its asset manager, and the property is already vacant in most cases — but condition and contract terms are the tradeoff.
Frequently asked
What is the difference between an REO and a foreclosure?
Foreclosure is the process that leads to an auction. An REO is the property the lender owns after that auction fails to produce a buyer.
What is the difference between an REO and a short sale?
A short sale happens before foreclosure, when the lender agrees to accept less than the loan balance. An REO happens after foreclosure, when the lender already owns the property.
Who is the seller in each case?
In a short sale the seller is the homeowner, with lender approval. At a foreclosure auction the seller is the foreclosing lender. In an REO sale the seller is the lender or its asset manager.
Which is easier to buy?
Each has tradeoffs. A short sale can take longer because it needs lender approval. An auction requires a bidder ready to buy on the spot. An REO is a more conventional sale, but condition and contract terms vary.
This page is general information, not legal, tax, or financial advice. The legal process and contract terms differ by situation. Work with a licensed New York attorney for your transaction.
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