Since becoming a Certified Distressed Property Expert (C.D.P.E.) and working more and more with distressed homeowners, I've become increasingly aware of how many consumers are not aware of the differences between a Short Sale and a Foreclosure or REO property. Most people looking to buy a home in today's real estate market are looking to get a HUGE discount! So naturally, everyone wants to look for foreclosed properties or short sales. That's a GREAT plan. However, you need to know what the differences are in order to prepare yourself for what you're getting into and know what to expect throughout the process.
A Short Sale is a home for sale that is owned by a distressed property owner, someone probably having trouble paying their mortgage due to some form of hardship. When the seller is not able to sell their home for enough money to cover their real estate commissions, closing costs and mortgage(s) pay-off, they reduce the price until they find a buyer. Let's say you owe $250,000 on your property and you're in this situation. You may only be able to find someone willing to pay $225,000 for the home. Well, after the commissions, taxes, attorney's fees and other closing costs, you're only left with probably around $207,000, but you owe the bank(s) $250,000. You're $43,000 short of your mortgage pay-off. So that offer, along with A LOT of paper work, gets sent to your mortgage company and they have to decide if they are willing to release the mortgage and loose that $43,000 or not. This process takes quite a bit of time. It usually takes a week or two just to get the paperwork to a negotiator at the bank. Then, that person, goes through the file and determines if the sellers qualify (according to the banks terms) for a short sale. If they do, the bank then orders a BPO (Broker's Price Opinion.) They find out what the current market value of the home is, and if the net amount of money they are receiving ($207,000) is close enough to that value, they will take it. Right now, that process will take anywhere from 4-8 weeks on average. The reason they take the short sale though is because if they are going to end up foreclosing on the house, they know how much that will cost in attorney and court fees, carrying costs once they own the home, maintenance, real estate commissions and closing costs to then sell the home. If their projections show them that they will make more money on the short sale than on the foreclosure, then they usually agree. There's MUCH more detail to it than that, but this is just to give you an idea so you know what you're getting into.
Then there are foreclosures, (REO's). These are a completely different creature. Foreclosed properties are homes which the banks have already taken back and now own outright and are selling. They usually need some work and aren't left in the perfect "home showing condition." However, in many cases, they aren't that bad and only need minor cosmetic repairs. It usually only takes a few days, if that to get a response when you make an offer on a foreclosed home,. Sometimes it can be longer, but sometimes you'll get a response in as little as a day. The banks usually make you sign a lot of disclosures saying you're buying the house as-is and they will not make any repairs, and that if you don't close by a certain date, they can charge you a certain amount of money each day until you do close. Because of that, always make sure you allow ample time in your sales contract to get your mortgage in line and ready for closing. Again, there are a lot of other details I could go through, but this is just to give you an idea of what each of them entails so you know a little about what to expect.
If you want more information on purchasing a short sale or foreclosed home, please feel free to click at the top of this page or just below this post to one of our web sites that will help you search the MLS for your next purchase. Or, if you are in the position where you think you might need help with a short sale or a loan modification, click the distressed home owner's link at the top of the page or below this post or email me for more information.
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