What is the Difference Between a Short Sale and a Foreclosure?
Here is how to get a great deal on foreclosures and short sales while heeding all the risks when buying a home.
Not sure about the world of foreclosures and short sales? Don’t worry. Here’s a rundown of everything you need to know to grasp the basics of foreclosures and short sales.
What Are Foreclosures and Short Sales?
A foreclosure is a process by which a lender is able to repossess a property when the borrower defaults on loan payments.
A pre-closure is the period between when the lender files the Notice of Default and when the foreclosure process is complete. If the home is sold during this period, the transaction is called a short-sale foreclosure (or “short sale” for short).
While both a short sale and a foreclosure result in the unfortunate event of the borrower not being able to stay in their home, a short sale allows a borrower to avoid the harmful effects that a foreclosure would have on their credit score.
How Can You Buy a Foreclosure/Short Sale Property?
There are fewer foreclosures and short sales on the market today than there were a few years ago. “Default notices, scheduled auctions and bank repossessions…are down more than 7 percent from a year ago,” according to RealtyTrac’sNovember 2015 U.S. Foreclosure Market Report™.
But if you’re a buyer, you can still find a great deal on a foreclosure or short sale, particularly if you work with an agent who focuses on finding these deals.
If you are interested in purchasing either a foreclosure/short sale property, talk to an agent who specializes in foreclosures and short sales.
What Are the Pros and Cons of Buying a Foreclosure/Short Sale Property?
Let’s start with the advantages.
Foreclosures and short sales are often priced below retail, which means that you can buy these properties for less than the cost of other comparable homes. Subsequently, your monthly mortgage payments will be smaller and you’ll spend less interest over the life of the loan.
Furthermore, you may build equity quickly, particularly if you improve or renovate the home. This equity increases your net worth, and you have the option of borrowing against this equity in the future if you choose.
Additionally, if you purchase a short sale, you’ll also enjoy the emotional satisfaction of knowing that you helped someone avoid foreclosure.
Although foreclosures and short sales can offer the buyer exceptional deals on real estate prices, there are some drawbacks.
Foreclosures and short sales often need renovations or repairs. It’s likely that the owner wasn’t able to maintain the property, which means that you might have to deal with deferred maintenance issues. It’s important to get a full report of the maintenance issues you might face. Ask your real estate professional if he or she can recommend a qualified licensed home inspector who can produce a full report for you.
It is possible that some foreclosed properties are vandalized while they’re vacant, which can add to these repair bills. However, this damage will generally be reflected in the pricing of the home.
Foreclosures and short sales are in shorter supply, which means there’s a lower likelihood that the property has all your wants and needs. You may need to compromise on certain features, amenities or desired location. You may also need to act quickly, as these opportunities can get snapped up fast.
For a short sale, the seller may be motivated to sell, but he or she may not be able to budge on the negotiation price due to the outstanding balance on the mortgage.
Short sales are notorious for their lengthy closing times – typically between 45-90 days. This is because the original lender needs to approve the sale. If you’re in the market for a quick closing, a foreclosure or short sale property may not be for you.
That said, however, the financial benefits of buying a foreclosure or short sale can be fantastic for homebuyers who are flexible and patient.