SHORT SALES AND FORECLOSURES … A SIMPLE EXPLANATION

Are you ready to buy a home and thinking about purchasing a Short Sale? If you have read the news you may be asking yourself what is a Short Sale and should I buy one. A Short Sale occurs when a property owner can’t sell their property for what they owe on their mortgage. In essence, they need the bank to reduce the total amount owed on the mortgage so that the property can be sold for an amount in line with the fair market value of the property. Because many lenders have agreed to reduce the loan balances on properties so they can be “sold short” of what a Seller owes on the loan, there are some incredible opportunities for buyers.

However, before purchasing a Short Sale, it’s very important to understand that the bank holding the mortgage on the property makes the final decision to either approve or deny a short sale on the property. Many times this can be a three to six month wait before the bank responds. In most cases, the bank has not declared a price they will accept and the seller places an unrealistically low "teaser" price as their asking price to entice multiple offers. For many buyers who are either on a deadline to close or who have their heart set on a particular property, this can be very disconcerting. Often the bank has not even agreed to short sale the property yet. In addition, there could be many offers waiting to be considered for the same property. To date, only about 10% of the short sale properties are reaching the closing table.

With the complexities facing any buyer considering the purchase of a short sale, researching the property has become more important than ever. Many properties that have been listed as short sales are either in pre-foreclosure or foreclosure. “Pre-foreclosure” is defined as a property where the owner has defaulted on their mortgage loan but there has been no foreclosure filing. A property that is “in foreclosure” is not just a defaulted mortgage loan but a property where the lender holding the lien on the property has already filed foreclosure proceedings to take title back to the property.

Researching whether the property is pre-foreclosure or already in foreclosure is an important indicator of the success a buyer may have in purchasing a short sale. In general properties that have already been in foreclosure for lengthy periods of time are more likely to be foreclosed before a short sale is approved.

In these instances, many buyers are left out in the cold as any pending contract on a property that has been foreclosed is automatically extinguished or terminated upon entry of the foreclosure judgment. After the foreclosure proceedings are completed, the lender takes title to the property, in which case it is now referred to as an “REO” property or real estate owned by the lender.

The big question is this: is there enough time to seek approval on a short sale of the property or if a foreclosure of the property is unavoidable?

Once the lender has foreclosed on a property, the bank now owns it and sets the price it will accept. The ones in the nicest condition and with a low asking price have been getting multiple offers within days of entering the market, mostly well over the asking price. The bank normally responds to an offer within days of receiving it.

Others in distressed condition can sit for months deteriorating rapidly.

Foreclosures can be great buys, but are conveyed in "buyer beware" conditions, sometimes demanding inspections to be completed before even offering to purchase. Others have racked up months of homeowner or condo association fees which the buyer may have to pay at closing.