In this article I will be discussing the differences between short sales and foreclosures. I will also touch briefly on the process for these. Please keep in mind that this is a blog and to go into great detail would take several blogs.
First and foremost a short sale is not a foreclosure! A short sale is a property that is still owned by the person who bought the property. Unfortunately the individual ATTEMPTING (take note) the short sale has usually run into financial hardship. In most cases they have tried to sell the home well before they decided to do a short sale but market conditions do not support the price they owe.
A foreclosure is a property that is owned by the Bank. Another term associated with them is REO (real estate owned). After the foreclosure process is finished they then hire an agent (in most cases) to list and sell the property. As a buyer you have 3 chances to purchase that home. The first is before it’s foreclosed on. You can find which properties are about to be foreclosed on by hiring a thorough agent. You can go to the auction (if auctioned) and attempt to purchase it there. Lastly, you can purchase the property once the bank takes ownership and it has been listed.
Most individuals do not know what a short sale is or that they have that option. In that case an educated agent can honestly be a saving grace. If the individual is behind on their mortgage and the market is not supporting the price they owe, a short sale can be the answer. I found out that most individuals believe there was nothing they could do but let the home go into foreclosure. If they did know about short sales they did not know that a short sale can possibly save that persons credit. In speaking with experts I have come to the conclusion that the day a bank forecloses on an individual their score drops 200-300 points. Since SC is a judicial state the bank can the place a deficiency judgment on that person credit after they sell the property. In most cases the bank takes a large loss compared to what is owed when it sells. That could drop your score another 50-100 points. By doing a short sale your worst case scenario would be a deficiency judgment for the difference between the amount owed and what it sold for. In a lot of cases they don’t even place a judgment on your credit! Reasons to not be approved for a short sale by the bank include but are not limited to: having a large amount of savings or taking a loss well below the market value of the property, which is assessed after the BPO is hired.
Purchasing a short sale can take up to 6 months. You have to make the contract contingent on 3rd party approval. That means you have to get approval from the bank. Once you write a contract on a short sale the seller will put a financial packet together and send that with the contract to the bank. The bank will then assign a negotiator to that file and order a BPO. Once the bank approves or disapproves the price you can then move forward with the purchase of the home. When I take a listing that is going to attempt a short sale I try to keep the price within 25% of the amount owed. That will increase the chances of it being approved. If you are seller it is important to know that you are ATTEMPTING a short sale and in no way, shape or form does it halt the foreclosure process. You can be foreclosed on while attempting the short sale!
Purchasing a foreclosure is a much faster and smoother process. It is pretty much the same as a purchasing an owner occupied home. The main thing to know about is the bank addendums. These are documents that you will have to sign and cannot alter if you want to purchase the home. They are tailored to protect the bank and punish the buyer for any type of breach. Make sure to review these addendums thoroughly before signing them.
Please note that this blog does not guarantee any scores on your credit or promise that a short sale is your best option. Please consider renting, consult with an attorney or your agent before doing anything. This is not a recommendation as each person circumstances may vary. Please understand that the process goes into much greater detail but I tried to keep that as short and sweet as possible while including some of the important information.
THE FRED HOLLAND TEAM