For those new to the real estate investment arena, it’s both an exciting and sometimes confusing process. Real estate is a proven way to establish long term wealth and in today’s real estate real estate investment termsenvironment, there are plenty of opportunities. Yet if you’re new to the industry or considering buying your first property, where should you start? You’ve heard the term “short sale” right? And “REO” maybe? Foreclosure? Before you get too far, it’s important to understand these oft-confused terms.

A short sale is not a foreclosure or an REO. REO stands for Real Estate Owned and identifies a property that the bank has already foreclosed upon and the real estate is in the bank’s own inventory. A short sale occurs when a mortgage company accepts less than what is currently owed on the property from the property owner.

For example, a couple owns a home they’d like to sell but they owe more than what the home is worth. A recent appraisal indicated the home is valued at $150,000 but they owe $200,000. If they sold today, the mortgage lender wants their $200,000 at the closing table and the owners would have to pony up with the difference. The property owners are underwater and they’re stuck with few options.

The owners contact the bank with a sales contract from a buyer for $150,000 and ask that the bank accept the $150,000 offer as “paid in full.” If the bank agrees, then a short sale occurs. There is no foreclosure in this example.

A foreclosure means the bank and the owners couldn’t come to an agreement and the owners could no longer make the mortgage payments on the home. The bank forecloses on the property and takes full ownership of the home. The home is then placed in the bank’s REO department who makes arrangements to sell the property to others.

REO, foreclosure and short sale are common terms in the real estate industry, and while common they’re not the same. They all provide investment opportunities, just in a very different manner.