Foreclosure Buyers: Avoid Short Sales!

Most articles you'll find about Foreclosures and Short Sales are focused on sellers who may be losing their home to foreclosure. However, if you're a buyer looking for information on what you should purchase, then you need to be aware of the hidden pitfalls and frustration that can come with buying a short sale.

Aren't Foreclosures and Short Sales essentially the same?

At first glance from a buyer's point of view, a Foreclosure and a Short Sale (or pre-foreclosure) wouldn't seem any different. They both are being sold for much less than they were last purchased, the bank gets all the money from their sale and has final say as to how much their acceptable price is, and both are very abundant in this market.

There are however some major differences between Foreclosures and Short Sales buyers should know.

The Foreclosure

• Bank Owned

  The property has already gone through the foreclosure process, is now owned by the bank and being offered for sale via the agent the bank chose as its representative. All parties involved are interested in negotiating a price that both sides will agree to.

• Realistic list price

  The bank has already done the work of figuring out what the property is worth and what price will likely get it sold. A foreclosed property isn't making any money for them and they want to be rid of it as quickly as possible.

• What you see is what you get

  A foreclosed house will almost assuredly be vacant. This means you can view the property in its entirety and see exactly what you're getting. If there are repairs needed on the house this will likely have already been factored into the list price.

The Short Sale

• Not Bank Owned

  A short sale is still owned by the last person / entity who bought it. The owner is either no longer able or no longer willing to make the payments, and they are probably unable to sell their home because the value of the home is now much lower than what they currently owe on their mortgage(s). In this situation, the owner has chosen to try to negotiate a "Short Sale" with their bank. In a Short Sale, the bank allows the seller to sell their home either at or below the current market value and "forgive" the difference.

• List price set low to get multiple offers

  The price that is listed on a Short Sale property is the price set by the current owner of the house and their listing agent, and in many cases is not even approved by the bank. Because there could be over 30,000 homes on the market, many listing agents will drop the price so that it looks like a great deal, which means many people will want to see it, and will make offers.

• Multiple Counteroffer

  The listing agent will often receive several offers and may put out a "Multiple Counteroffer" to all the parties who made offers. The Multiple Counteroffer will state that there are several offers on the property and will ask everyone to submit their best and final price. So, after all is said and done, the offers usually end up being much higher than what they were originally asking. Even so, the bank still may or may not approve it!

• Owners or tenants may still be living there

  With the average vacant foreclosure property you can expect it to be in its current condition when sold, a Short Sale however the sellers will be walking away from the property after the sale with no home, no extra money, a mark on their credit and no incentive to leave the property in good condition. Potentially even worse if there are tenants in the house, they may have gotten very short notice if at all that the house was being sold, and now find themselves in someone else's house and without a valid lease.

"SHORT" sale???

These days, a "Short Sale" can be anything but short. As a matter of fact, in this market, it takes on average 30 to 90 days to purchase a home through the Short Sale process. Because so many homes are going into foreclosure, banks have to hire negotiators, who are inundated with files (many are handling over 100 files at a time). It can be extremely difficult for a listing agent to get in contact with their negotiator. Since the negotiator is such a crucial part of the Short Sale process, it is imperative for the negotiator to be in contact with the agent so that all necessary parts of the Short Sale can be completed. With such few negotiators available to handle all the files, it is taking a very long time to get the Short Sale approvals. Meanwhile, buyers are waiting several months just to get a yes or no answer.

The process in detail:

Sally Seller purchased her home 2 years ago for $350,000, and she currently owes $300,000. But because of the rapid decline of the market in the last year, her home is only worth $200,000, so she is unable to sell it. The bank may allow her to sell her home for $200,000 and forgive the difference of $100,000 so that she may avoid foreclosure. She can still be involved in the selling process by hiring a Realtor, marketing the property, and accepting offers.

Sally Seller hires a Realtor and puts her home on the market. After she receives an offer, the offer is submitted to the bank. The bank will wait to accept other offers to see if they can receive a higher bid. Once they accept an offer, the offer is accepted subject to Short Sale approval. What that means is that once they perform all the necessary functions to approve the Short Sale, the Short Sale must be approved; otherwise, the home will no longer be eligible for sale to the buyer.

Because the bank is granting the owner the opportunity to sell their home through the Short Sale process, the sale of the home is still subject to the bank's approval. The bank will look at factors such as the seller's financial situation and the home's current market value, and they will determine whether or not they will accept any offers that have been made on the property. So, in essence, you can make an offer on a home that is subject to short sale approval and wait several months for an answer, but if the bank decides not to approve the short sale or accept your offer, you will have lost out on time and potentially money.

Why the Foreclosure is better

A Foreclosure (or REO) property is completely owned by the bank. It has gone through the entire foreclosure process and is now fully controlled by the bank. The property generally will be vacant, there are no negotiators to deal with. Instead, you deal directly with the listing agent that the bank chose as its representative. The bank has already done the ground work and has come to a bottom line price that they find acceptable. There is usually less waiting time for an answer, and once your offer is accepted, you are able to begin the escrow process. REOs do not need all the steps for approval that Short Sales do, so it is usually a much easier process to work with. You make an offer, and once your offer becomes accepted, you are on your way to moving in!

So where do I find foreclosures?

That part's real easy, just click over to Century 21 Infinity Foreclosures and sign up for our foreclosure email list, and we'll take care of the rest.