Understanding Foreclosures and Short Sales
The differences between a foreclosure and a short sale and how they both affect the buyer and seller.
Over the last three years, we have seen the U.S. economy struggle. Job loss and wage reduction along with a severe drop in real estate values have created a foreclosure and short sale market. What does this mean for both buyers and sellers in today's market?
A foreclosure occurs when a homeowner stops making payments. After a period of time, the bank takes back the house on the courthouse steps. Last month in Dacula, 103 properties - or one in every 91 housing units - received a foreclosure notice according to Realty Trac. The average for Gwinnett County as a whole is one in every 160 units. Currently, the only area of the county with a higher foreclosure rate than Dacula is Snellville where one in every 87 units entered foreclosure in November.
Once a property is foreclosed, the bank will hire a realtor to market the home. In this case, the foreclosed owner will have damaged credit and will not be able to qualify for a home purchase for the next three years. This gives the owner time to try and re-establish a good credit history.
Foreclosures are typically aggressively priced and offer a great value to any buyer. Buying a home from a bank takes about a week longer than a traditional purchase due to the amount of time it takes to get all the additional paperwork signed, but can be a smooth transaction after that point. In most cases the buyer gets a great deal on their new home.
A short sale occurs when a homeowner wishes to sell a house, but owes more than it is worth in today's market. For example, a homeowner bought a house in 2005 for $200,000 and borrowed $190,000. Today that same house could be worth as little as $150,000. In this case the seller would be $40,000 short when they get to the closing table.
The seller has two choices: Write a $40,000 check at closing or request a short sale from the bank. In this case, the bank approves the sale and, in many cases, forgives the $40,000. The downside is that the short sale will affect the seller's credit and they will be ineligible for a new mortgage for three years.
A short sale for a buyer has both positives and negatives. The positive is obviously price. Sellers in pre-foreclosure often price their home very aggressively to attract buyers and get a contract. Once the contract and short sale package is turned into the bank, the bank may pull the house from the foreclosure list in order to evaluate the offer.
The downside from the buyers perspective is that the banks could take several months to evaluate the sort sale. After a long waiting game, the answer from the bank could be yes or it could be no. The bank could also come back with a counteroffer. The buyer may not want to purchase the house at a higher price. In either case, a buyer may wait several months and ultimately have no deal. So, there are obvious risks in pursuing short sales, but, if accepted, the deal could represent a great deal for the buyer.
Make sure your Realtor is educated and knowledgeable about foreclosures versus short sales. Your Realtor should be able to explain the pros and cons of each and every deal on the market.