A "simple summary" of Short Sales and Foreclosures
What is a Short Sale? A short sale occurs when a lender agrees to take less than the full loan payoff for an owner's property. In most cases, the owner is in default and is not making their payments for whatever reason. Short sales, in most circumstances, are the first step to avoid foreclosure. Although the lender(s) will recover less than the total loan amount in a short sale, they may prefer this in lieu of foreclosure. The costs of foreclosing on a property may be more than the bank's loss by taking a short sale.
Short sales are very complicated and the outcome is not guaranteed. There are so many variables that we can’t cover everything in a short summary. The bank is not obligated to take a short sale and in most cases the process to get one approved is cumbersome and frustrating for the Buyer, Seller and the Realtors. Many times these requests are not approved by the bank and the property ends up going to foreclosure anyway. Banks are overwhelmed with short sale requests and the approval process can take months. Each bank evaluates each individual request on a case by case basis. Many times there is more than one lender involved. Not only do the banks consider the borrower's personal and financial situation, but they also consider an appraisal of the property, market conditions, the banks financial situation, their current portfolio and in many cases have to consult with an outside investor who purchased the loan at some point. Given all of these varying circumstances, you can imagine why this process takes so long. Most buyers do not want to wait out this long process and deal with the uncertainty. If a short sale is approved, it can be below market (depending on the bank appraisal), but by the time it's approved the market may have further declined and it may not be a great deal after all.
If you are considering selling your home as a short sale, please consult with a CPA and an Attorney first! Depending on the types of loan(s) you have and your financial situation, it may or may not be the best option for you.
What is a Foreclosure? Foreclosure is the process whereby the lender takes possession of the property. When a home owner fails to make the payments on his/her mortgage, the lender can begin foreclosure proceedings. This is a very specific legal process with set timelines and outcomes. In a Short Sale situation, the home owner's name is still on title of the property and they are the official owners who are trying to sell the property. In a foreclosure, the lender takes possession of the house and as a result, the homeowner is no longer a party in the sale. They do not come with any type of warranties so you are buying them “As-Is”. Typically it takes around 48 hours or so to get an answer from the bank, in many cases they may have multiple offers. There are more "hoops" to jump through and more addendum's to sign in a foreclosure than with a traditional seller.