Every buyer wants a "deal" right now and I don't blame them!
Here is El Paso County we have an 8 month supply of houses (compared to a 5-6 month "normal" supply) and at 
least 1 out of 10 of them are "distressed sales" (foreclosure, pre-foreclosure, etc.). Although these figures vary vastly on a neighborhood by neighborhood basis. As an example, the Southeast part of town has been hit particularly hard by foreclosures and short sales, while the Northwest part of town is fairly stable. Even though these numbers may sound bad, lots of areas have 8 out of 10 properties that are distressed; especially in cities like Phoenix and Las Vegas.
Buying a pre-foreclosure or a foreclosure can be very different experience, both from a "normal" sale and from each other. Here's a quick synopsis of the differences:
Pre-Foreclosure (often a short sale)
A short sale occurs when a house is worth less than the mortgage, and the seller's lender accepts less than what is owed on the mortgage.
As an example, a seller may have a mortgage of $250,000 on their home in Colorado Springs. The seller is taking a job in a new city and the house is now only worth $220,000. A buyer makes an offer on the house in the amount of $220,000 and the net proceeds to the bank is $205,000 by the time the owner pays the real estate commission and the seller's closing costs. The buyer and seller sign the contract but the offer is subject to approval by the lender, as the bank than must agree to accept $205,000 vs. $250,000 to pay off the loan. Hence the term short sale.
Some statistics say that a lender typically loses about 19% of a mortgage's value in a short sale; while they lose an average of 40% on loans that go into foreclosure.
Since the homeowners are often still in the home, it is likely to be better maintained than a true foreclosure, possibly needing little to no repair work.
The downside to buying a short sales is that it take a long time to negotiate. A typical time-frame would be 4-8 weeks from the offer's submission before you hear back from the bank and another 4-8 weeks to negotiate back and forth with the bank and then another 4-8 weeks to close. So a short sale could easily take 3-6 months from start to finish. 2 months would be really really fast! I've had some that have taken over 8 months.
Short sales are great for people who have patience.
Foreclosures (bank owned properties that have already been foreclosed on by the lenders)
In a foreclosure, the lender has already foreclosed on the house and taken it back and put it back on the market. The foreclosed house will be vacant and possibly in need or repair work. It might need new fixtures and may even have been vandalized. This eliminates many buyers, as most lenders won't loan money on properties that are not habitable.
Foreclosures are often sold at a greater discount than short sales, and buyers typically receive a quicker answer. I've gotten answers in 24 hours, although I've had some take two weeks.
Foreclosure homes in Colorado Springs are also great for people who have the funds to make the needed repairs. Also, buyers need to be able to see the potential in the property and not be put off by their condition. It's important for buyers to do their homework. What's is cost for new carpet? New paint? Redoing all of the kitchen cabinets? Replacing all the appliances?
Both foreclosures and short deals can provide a great deal, but it is important to understand the differences between the two.
The original article was posted at: Buying a short sale vs. a foreclosure, what's the difference?
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Posted by KAT
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