The Difference Between a Short Sale and a Forclosure
With the turn of the economy in 2008, we saw many home going into foreclosure. Because they became know for being a “great deal”, buyers started searching for either foreclosures or short sales. The two became synonymous with each other, and while many clients continue to search for these types of listings, they often ask what the difference is between the two.
If a home owner is having difficulty paying their mortgage and needs to sell, but the home turns out to be worth less than they owe, they may decide to do a “short sale” with their bank. This means they are "short" the amount of money they would need when they pay off their loan. The word "short" refers to the amount of money needed, but it definitely does not apply to the process of getting a short sale sold.
In a short sale, banks lose money, therefore, they are required to have lots of people "sign off" on the paperwork explaining this loss of money. This can take time to go from one department to the next. The bank may even have to get the okay from a Private Mortgage Insurance company, who may have insured the loan, if the seller put down a low down payment. If they have a second mortgage on the house, the bank that owns that loan have to agree to take a loss too.
When a buyer puts an offer in on a home that is going through a short sale, it would be in their best interest to find out how far along the seller and the bank is in the process. If they have not yet been approved for the short sale, there is no guarantee an offer would even be considered. If the buyer’s offer is considered, first the seller gives permission to sell at the offered price, then the bank has to agree to that price as well. Counter offers can be made, even if the buyer is offering the asking price. In the end, the bank considers every penny it will lose, and makes it’s decision based on that.
An actual foreclosure means that all efforts to pay for a home or sell it have been exhausted. The bank goes to court to get the homeowner removed their house. They are then evicted and no longer own the home.
Purchasing a foreclosure, listed with a REALTOR, is not nearly as complicated as purchasing a short sale. In the case of a foreclosure, the bank IS the seller. Although there may be more paperwork, the process should not take much longer than purchasing from a traditional seller.
Purchasing a foreclosure from the courthouse is a far different endeavor. Is that case, the buyer participates in an auction on a certain day of the week, and will usually have to put 10% down that day. Generally, they will need to come up with the difference shortly thereafter. If the home doesn’t sell at the courthouse, the bank usually buys it, and in most cases, it will wind up with a REALTOR.
There are many REALTORS at KW who specialize in short sales and foreclosures. They are specially trained and have the knowledge and experience to navigate through the sometimes long and arduous process of buying a foreclosure or a short sale.