Monday, April 11, 2016
By Jed Williams
Short sale vs. Foreclosure

In today’s market, you’ll hear the terms short sale and foreclosure pretty frequently. While the number of these types of properties is certainly dwindling from what it was a few years ago, the effects of the market crash are lingering, leaving quite a few still available. And while it may seem scary for you to consider buying one of these properties, talk to your Hagan agent to determine if it might be a good move for you. You may have heard the process is long or there is a lot of paperwork. You may have heard horror stories of properties that were left in less than desirable conditions. While all of these are valid concerns, you don’t want the regret of walking away from a potentially great deal.

Buying a short sale or a foreclosure might be a good financial decision for you. The main difference between the two is who is responsible to sell it. In a foreclosure, the lender assumes these responsibilities after evicting the borrower from the property. A short sale is still under the ownership of the borrower, but steps are taken by the borrower and the lender before the borrower defaults on the property to get the property sold. In this transaction, the borrower is “short” the money it would take to sell the home at market value to repay the lender.

There are definite benefits to each type of property. Foreclosures typically sell for about 30% less than non-distressed, or “regular” homes. Because the lender takes over ownership, there is more negotiation potential than in a short sale. The price and closing costs are both negotiable, as are contingencies. Also, because the lender assumes full responsibility, the sale usually takes less time than a short sale. The caveats are that many times these properties are sold at auction and they are usually in worse shape than short sales. When the property is sold at auction, potential buyers must purchase sight-unseen. The sale isn’t contingent on home inspection, and investors usually come to auctions with cash in hand, which is far more favorable to the lender than a typical buyer. These properties also tend to be more dilapidated than short sale properties. The borrowers may have sour feelings about getting evicted, so they tear out countertops or floors or graffiti on walls. The borrowers tend to take fixtures out of the home, feeling they are owed at least a little of whatever they had paid toward their loan. While the buying process may closely reflect that of a more typical real estate transaction than a short sale does, there are certainly aspects that the buyer must look out for.

In a short sale, the borrower maintains ownership over the property, but is working with the lender to sell it. Most foreclosures could have been short sales if the borrower had talked to and worked with the lender sooner in the process. With a short sale, the borrower maintains most of the control in the sale of the home, but must get the bank’s approval before a final contract is agreed upon. Because there are extra steps to go through in the process, these sales tend to take much longer than regular real estate transactions or foreclosure sales. With that being the major downside to a buyer looking at purchasing a short sale, the upside is that the property is usually better maintained. Because the original borrower is still living in the home, it is usually kept up with. The borrower typically leaves the property in a livable condition complete with fixtures because there is a level of accountability that isn’t present in a foreclosure sale.

Both of these types of transactions have their benefits and pitfalls. Depending on your timeline, financial situation, and a number of other factors might determine which or if either of them is right for you. They have the potential to be a great investment or a great money pit. Discuss your options with your Hagan agent. He can help you think through what would be best for your specific situation.

Jed WilliamsJed Williams
Principle Broker and founder of Hagan Realty