If you are like most people you have seen these terms a lot in the media over the past few months.   They each refer to homes that are or have been in some kind of trouble, but they all vary slightly.

Lets look at each one in particular:

Foreclosure Homes:  When a home owner is more then 30 days late on a payment the bank can initiate foreclosure.  This requires the bank to file with the county and can be a long and complicated process.   At least the process can take 90 days, but most are taking several months to half a year to complete at least.  During this time the owner still owns the home regardless of their payment history and can pay off any back payments, penalties and interest to become current on the loan.  If the process goes all the way to foreclosure, the court will award ownership to the bank.

Foreclosed Homes: (notice the past tense)  These are the homes that have already gone through the long grueling process of being foreclosed on.  They are owned outright by the bank and are typically then sold on the open market for close to fair market value.   The process of buying these kinds of homes is not all that different from purchasing from an owner although it may take a little longer to negotiate with the bank as compared with an individual.

Short Sales: Short sale homes are those where the value of the home has dropped significantly due to the recent economy.  The seller is forced to sell for some reason, and will not be able to cover the cost of the loan and closing costs with the sale of the home.  Because of this scenario, the sale needs to be approved by the bank or banks that have loans on the home.  This can be one of the most frustrating ways to purchase a home.  The bank is not a principal to the transaction, yet reserves the right to dictate any terms they so choose at any time during the transaction right up to closing.  Some banks have figured out ways to make this process smoother, but most have not.  In fact the larger the institution and the larger the percentage of the banks portfolio that is in mortgages, the longer and more difficult the process seems to be.  The process can take anywhere from 90 days to 6 months.  As a buyer you can't have any communication with the bank and again the bank can demand different terms at any time. 

Distressed Properties: Distressed Properties are simply those where the owner has missed a payment for more then 30 days.  They are at risk for the bank initiating foreclosure, but not yet facing foreclosure.  They are not necessarily for sale either, just more then 30 days late on a payment and facing the penalties that go along with it.

Bank Owned Homes:  These are the same as Foreclosed Homes.  The bank has gone through the long foreclosure process and the courts have awarded them ownership of the home.  The sales take a few days longer to close on average but for the most part are very similar to purchasing on the open market from a home owner. 

Shadow Inventory:  This sinister sounding word is one that the media like to throw around a lot and sounds pretty foreboding.  It refers to the homes that may or may not fall into financial difficulty in the future.  The problem with using a term is it isn't specifically defined.  It can mean whatever the person using it chooses to have it mean.   Bad news sells in the media.  Referring to the looming 10% of shadow inventory makes for great headlines, but isn't exactly based on facts.  It can mean almost anything.  

I recently read about the looming 13% of shadow inventory that may flood the market and drop prices.  Well that is true.  It is also true that 100% of homes are at risk for becoming shadow inventory if everyone stops paying their mortgage.  

The reality that as of the last reporting 2.8% of homes in the Puget Sound Region are currently in some phase of foreclosure.  A much smaller number then most media outlets report as "shadow inventory".  

If the economy improves that number will go down.  If the economy deteriorates, that number will go up. End of story.