Traditional sale versus short sale versus foreclosure: what buyers need to know
Jim Geymont on 18 May 2019
If you’re a buyer looking for a fixer-upper or just hoping to get a real good deal, you may have considered looking for a foreclosed or short sale property. While it’s not impossible to save money by purchasing a distressed property, it’s important to understand that the buying process differs from a traditional home sale, often taking considerably longer to go under contract and close, for example. It’s a good idea to seek professional advice and guidance from a Realtor experienced in these kinds of properties.
In addition to being patient and enlisting the aid of a professional, here are a few other things to keep in mind if you are hoping to save with a foreclosed or short sale home:
Short sales may not be the bargain you expected
A short sale is when the seller’s lender has agreed to accept a loan payoff that is less than what is owed on the mortgage. Unlike a foreclosure, this does not necessarily mean that a seller is in default on their mortgage. In some instances, the loan may simply be “upside down,” meaning the seller owes more than the home is worth, due to a drop in home value. Discounting the price through short sale may bring it more in line with what the market will bear.
One of the biggest differences between a short sale and traditional home sale is that with a short sale, the lender has final say on whether or not your offer is accepted. This can sometimes be frustrating for buyers who have followed the stated terms of the short sale when making the offer only to see the process drag on for several months. Short sales can take anywhere from two to four months to close, on average. If you are trying to time the purchase of your new home with the sale of your existing one, you are unlikely to succeed with a short sale property.
Nearly all short sale properties are being sold “as is.” While you can still have a qualified professional look over the home, don’t expect the lender to fix any of the recommended repairs on the list.
Another word of caution about short sales is that sometimes overzealous and inexperienced real estate agents will list a property as a short sale without first ensuring that the seller has confirmation from the lender. Often, these homes are listed well below market price, yet lenders are unlikely to accept a short sale price much below market price.
Bottom line: Just because a property is being marketed as a short sale doesn’t mean it’s actually going to sell at or near the price listed since it requires lender approval. Unlike traditional home sales, you will be reliant on the seller’s agent to properly package your offer and present it to the lender. You can also expect to go it alone when it comes to needed home repairs and may end up paying higher closing costs than with a traditional sale.
Bargains are possible, but beware the money pit of foreclosed properties
With a foreclosure, a homeowner has defaulted on their mortgage loan and failed to get back on track, even when offered alternatives for doing so. A lender will issue a notice of default via certified mail, typically giving the homeowner 90 days to pay off the current bill. If the homeowner fails to do so, the lender will issue a notice of sale and sell the property at auction to the highest bidder. As a winning bidder, you will be expected to pay the full amount of immediately.
Although foreclosure is an unfortunate process for the previous homeowners, buyers may find a bargain. Often, lenders will be eager to get rid of foreclosure properties, hoping to break even by selling the home for the equivalent of the remaining mortgage, interest, penalties and legal costs. What that means for buyers is that on average, lenders will accept a price for a foreclosed home that is around 15 percent lower than a home’s actual value.
There are still a few words of caution, however. Most foreclosed properties are not well-maintained. Some have been neglected for years, due to the financial strains experienced by the owners. Foreclosures are also sold “as is” and the lender is not going to pay for repairs to be made. You can, however, hire a home inspector to go through the property and give you an estimate.
Finally, unlike a traditional home sale where the homeowner is required to disclose a home’s past and present issues and flaws, there’s no such stipulation when it comes to a foreclosure. It will be up to you, with the help of professionals you hire, to learn the condition of the home you are buying. Unfortunately, not all problems will be visible, even to a home inspector.
Bottom line: While they may offer more opportunity for scooping up a bargain than a short sale, you may still find yourself shelling out so much for repairs that any savings you experienced soon disappears.