They are very popular across the United States right now and are a huge word in real estate. In simple words a short sale is when a home owner is upside down in their home and owes more on it than it is worth. A short sale is very often another term used for Pre-Foreclosure. A short sale is when a lender agrees to take less than the full amount owed on the home. Very often there are multiple lien holders because the home owner has taken out second and third mortgages and is no longer able to make the payments.
Short sales are very often the last effort the home owner will make in an effort to avoid foreclosure. Although the lender(s) will receive less than the total loan amount owed, they very often prefer getting a smaller amount in a shorter time period and with less effort than going to foreclosure. The costs of foreclosing on a property are very often greater than the bank’s loss by taking a short sale. Another reason the lenders prefer the short sale to a foreclosure is that the property may not sell at the foreclosure auction and then the bank would be forced to take it back. As an REO (Real Estate Owned) property, the lender would have to maintain, list and sell the property themselves. Banks are not in the real estate selling market and would prefer to stick to lending money…not selling homes. See more on this below in the REO section.
Short sales are very complicated, time consuming and the outcome is never guaranteed. In most cases the process to get a short sale approved can be difficult and extremely frustrating for the buyer, seller and the real estate agents involved. Banks are completely over run with short sale requests and the approval process can take up to 2-6 months. The bank employs a Negotiator to evaluate each individual short sale request on a case by case basis.
From the banks perspective there are many factors that go into the decision making process and are also factors in the long time frames. Banks consider the home owner’s/borrower’s personal and financial situation, appraisal of the home, market conditions, the bank’s financial situation, and in many cases they have to consult with the outside investor who purchased the loan. Given all of these varying circumstances, you can imagine why this process takes so long. Many buyers are not willing/able to wait through this process. For those that can, most often buy a home well below market value and begin their home ownership with instant equity.
What is a Foreclosure?
Foreclosure is when the bank/lien holder/mortgagor takes back a home that the borrower/home owner/mortgagee can no longer make the payments on. The foreclosure process and home owner rights are VERY different in each state. If you have a specific foreclosure question you should consult an attorney in the state where the property is located.
When a home owner fails to make the payments on their mortgage, the lender can begin the foreclosure process. This is a very specific legal and judicial process with set in stone timelines and proceedings. In a foreclosure, the lender takes possession of the house and the homeowner is forced to relocate.
Foreclosures are NOT sold by Realtors. Foreclosure properties are auctioned once a week at a Public Trustee Sale in the county where the property is located. These auctions are open to the public and anyone with CASH is able to make a bid on any foreclosed property. Foreclosure properties must be paid for in full, with a cashier check at the time of the auction.
When you purchase a home at a foreclosure auction, you could be at risk of multiple legal, judicial and title problems that are typically researched and overcome by Realtors and title companies in normal sales transactions. These issues include, but are not limited to: title problems, multiple lien holders, IRS liens, tenants or owners still occupying the property, and/or structural, functional or pest issues. Since you do not have the opportunity or the right to visit and inspect foreclosure properties before the auction, only the most seasoned and savvy investors are encouraged to participate. Very often there are unforeseen risks that may run into the thousands of dollars to overcome.
What is an REO?
REO is an abbreviation for Real Estate Owned properties. If no one purchases the property at the Foreclosure Sale, then the home is returned to the lending bank and goes on the ‘regular’ market for sale through a Realtor. Typically, lenders are very motivated to sell these homes as quickly as possible, as they are in the business of lending money, not owning real estate. Another downside for the lenders in holding these properties is that the management of these properties can become very costly.
Buying an REO property can very often be the best opportunity to find a good deal for the general public. The reason that REO’s are the best opportunity for the general public is that any buyer can submit an offer. Once the offer is accepted by the selling bank, the transaction is just like any ‘normal’ real estate transaction. The buyer has the opportunity to preview the property before writing an offer. The buyer can than utilize conventional and sometimes FHA financing. They also have to opportunity perform any inspections and due diligence necessary. The banks will very often have their own set of addendums and disclosures for the buyer to agree to and should be carefully reviewed by the buyer, buyer’s agent and potentially the buyer’s attorney.
How each one can affect your credit?
(The below information was provided by a local lender that I use in Fresno County)
A short sale hurts your credit for 12 months.I have gotten people into new homes 13 months after a short sale.
A foreclosure hurts your credit for 36 months, you cannot purchase for 3 years after a foreclosure.I have gotten people into new homes 38 months after a foreclosure.It has to be reported on any loan application for 7 years. (credit must be re-established in either case)
What is the time frame after a short sale can you purchase again vs. a foreclosure?
12 months short sale / 36 months foreclosure.
How does the lender look at a short sale on your credit vs. a foreclosure?
A short sale doesn’t follow you for very long.If there is a loan file that is close on ratios etc the foreclosure may hurt as far as an underwriter is concerned.
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