The Difference Between a Foreclosure and a Short Sale
The big draw to buying a foreclosed or short sale property is the price—always below market value. For people unfamiliar with real estate and banking rules, the difference between a foreclosure and a short sale can be confusing; we’ll break it down in layman’s terms, and show you how you can benefit as a buyer from both.
What is a foreclosure?
A foreclosure is a legal process, where the paper owner of the foreclosed proper (almost always a bank) evicts the occupants and takes physical ownership of the property. Foreclosed properties can be listed as soon as the legal foreclosure process ends.
What is a short sale?
Short sales happen before the foreclosure; both the lender and borrower agree that selling before the mortgage goes into default is the better way, and the house is sold as quickly as possible.
How are foreclosures and short sales different, in practical terms?
Foreclosures have a different set of buying conditions than short sales. Usually, you can’t walk through a foreclosed property or bring in an inspector; foreclosures frequently go sight-unseen, as a condition of the sale. The location and age of the property only offer so much information; bad foreclosed properties (often called “REOs”—real estate owned) are money pits. A foreclosure sale is a relatively fast business transaction—once the money is in place, the closing can happen in less than thirty days. Right now in the USA there are 800,000 homes properties in foreclosure, down from a million at the height of the financial crisis after 2008. For people who are foreclosed upon and evicted, the ramifications can be stark—homelessness, bankruptcy and its seven years of bad credit, and five years of being barred from applying for another mortgage.
In a short sale, the closing can be delayed for months or even a year while the bank decides whether or not to accept the offer (and waits for/reviews other offers). Another difference between the two kinds of sales, which often contributes to the length of the transaction, is that foreclosed properties are usually empty—or, for in some cases, inhabited by animals or vagrants—while short sale properties are often still occupied by the homeowner, who is in the process of giving up their home (whether they want to or not).
What benefits (and drawbacks) are there for buyers of foreclosed properties?
One benefit for buyers of foreclosed properties is that the responsibility for paying off liens and any other selling expenses falls to the bank—who, let’s be honest, still profits off this sale. Forfeited mortgage or not, the bank made money off the mortgage’s origination, and any mortgage payments that were made; and it profits again at the closing. The title, in a foreclosure, is secure. Some banks will pay up to 3% in buyer’s closing costs, just to get rid of the property. “Trustee sales,” public auctions where buyers bid on homes and vacant lots, are another way foreclosed properties sell fast. The real cost to a buyer of a foreclosed property is unknown: you may have to upgrade all the plumbing and electrical systems, build a new roof, or rip up rotted flooring. Vandalism, theft, dead landscaping, stolen pool equipment, recent damage from the elements—all are possible expenses. In some areas of the country, Florida included, squatters live in foreclosed homes, and evicting them is a legal process.
What are the benefits (and drawbacks) of buying a short sale property?
Short sale homes, in contrast to foreclosures, are usually in great shape, because the homeowners have been living in them, maintaining and upgrading them. If you decide to buy a short sale home, you’ll need an aggressive, experienced negotiator. A realtor, attorney or third party can fill this role. Find out how many deals this person has facilitated in the past, and ask for references. Short sales are not short in terms of time—they’re short on the mortgage. If you don’t have someone continually working to close the deal, it can drag on indefinitely.
Another obstacle to closing a short sale is that banks don’t devote a lot of personnel to short sale real estate deals, and the people actually doing this work are overwhelmed, handling many, many files at a time. You’ll need to find out beforehand if there are liens on the property—a single property could have three mortgages, old liens from other businesses, owe taxes, even trash and sewer fees. Before a short sale closes, all these must be satisfied. If you have the time to wait, and you’re really committed to this one home, proceed, with the services of a seasoned professional. It’s likely you’ll have to raise your initial offer a bit to close the deal, but it will still be cheaper than buying a house at market value.