Foreclosure’s versus Short sale
Short sales and foreclosures are two financial options available to homeowners who are behind on their mortgage payments, have a home that is underwater or both. The term short sale refers to the fact that the home is being sold for less than the balance remaining on the mortgage – for example, a person selling a home for $150,000 when there is still $175,000 remaining on the mortgage. A foreclosure is the act of the lender seizing the home after the borrower fails to make payments. This is the last option for the lender, since the home is used as collateral on the note. There are different reasons for why a homeowner would opt for a short sale versus a foreclosure. The owner is forced to part with the home in both cases, but the timeline and other consequences are different in each situation. Limited financing options are available for Foreclosures and short sales, for a free consultation click here
“A short sale is when the property owner owes more on the mortgage than the market value of the property and is asking the bank to accept a short payoff of the loan,”
A short sale may or may not be in pre-foreclosure, but the homeowner is asking the bank to let it sell the property for less than what is owed on the loan.
Short sales go through a real estate agent, but they don’t function exactly like your typical real estate deal.
“The biggest misconception the average consumer has about buying a short sale is not realizing how long it takes,” says Field. “It can take between six months to a year to close. Also, people think they are going to get a screaming deal, but they have to understand that the bank is going to try to get as much back as it can.”
Even more frustratingly, a seller can accept an offer on a short sale, but that doesn’t guarantee that the deal is going to close. If the lender is not satisfied with the sale price, the home is not going to close. In some cases, foreclosure makes more sense for the lender because there are fewer costs associated with a foreclosure than a short sale.
Foreclosure means the property lender has taken back the property for lack of payment. It’s a long process. Buying a foreclosure is completely different from a typical home purchase. Generally, foreclosures are bought at auction sight unseen, meaning you could end up with a home in need of serious repairs. Field also explains that experienced investors go into foreclosure auctions with cash and a formula.
“For someone who just wants to buy a home to live in, it’s not a smart idea”- Tracey Martin
A major downside of a Foreclosure is they are not eligible for 100% financing and usually a large down-payment is needed. Click here for more info on how to get into a home with no money down.
But whether you’re a seasoned pro or a first-time home buyer, a foreclosure can be a risky investment for anyone. Many foreclosure homes are still occupied by their former owners, whom you would be responsible for evicting. Furthermore, “if you buy, you assume all liens, IRS liens, and other mortgages possibly tied to the property,” says Kevin Sucher, a real estate agent in Portland, OR. Before signing on the dotted line, do as much research about the property as possible and be prepared for surprises. Field suggests investigating websites that sell foreclosures, as they tend to have more guidance for the novice than an auctioneer at the courthouse steps.
Also, when bidding on foreclosed homes, be aware that having the highest offer won’t necessarily nab you the property.
“Servicers will go with the buyer most likely to close. They may take a lower price from someone with better terms,” Field explains. In short, unless you’re shopping with cash, you might have to bid on several properties before you find a winner.
“It can be done,” Field says, “but it requires caution, patience, and ideally guidance from someone with experience buying foreclosures.”
Foreclosure and shortsale information from: