Who doesn’t love a bargain? When it comes to real estate, buying distressed property at a reduced rate makes a very compelling proposition. Before you start looking at homes that are under market value, understand the differences in distressed property sales. Vivix Credit Solutions says that your ultimate decision about which to buy, if any, should depend on your goals regarding home ownership and your finances.

When the lender repossesses property because the mortgagee fails to keep up with the payments, the resulting situation is called foreclosure. Vivix Credit Solutions explains that the two other common types of distressed properties are short sales and REO, which stands for Real Estate Owned.

During a short sale, the lean holder agrees to let the owner sell the property for less than the outstanding balance of the loan to avoid foreclosure. Not all mortgage holders will agree to a short sale, Vivix Credit Solutions points out, especially if it’s more advantageous financially to foreclose on the property.

While the bank does not own the property in a short sale, it has to approve the sale. This can take months since banks generally are slow to approve short sales. Vivix Credit Solutions cautions that you also should expect to purchase the house ‘as is.’ Banks will not reduce the price to compensate you for repairs. You can include terms in the contract that enable you to back out if the inspection indicates a lot of problems, however.

Keep in mind that not all short sales are great bargains, since banks aim to get a fair market value.  Before you make an offer, check comparable listings in the area.

As a final word of advice, Vivix Credit Solutions advises that you work with a real estate agent or broker who is experienced in short sales. This type of sale is a complex transaction and you want representation from someone who is familiar with the process.

REO in contrast to a short sale is a property that goes back to the bank after it fails to sell at a foreclosure auction. Once in possession of the property, the bank will try to try remove any past due property taxes against the property or any other liens. After that the bank will try to resell the property through another auction or a real estate broker, Vivix Credit Solutions explains. Since the bank is the primary lien holder, all other claims against the property will be gone. That means when you buy the property you gain title free and clear.

Generally an REO sells at below market price. As the owner of the property, the bank liable for the property taxes and so is motivated to sell. The bank might negotiate for a low interest rate or low down payment.

On the downside, REO properties generally are in poor condition and the bank is not going to spend any money on repairs. The costs of repair may more than offset the bargain you are hoping to get.