Things to consider before buying a short sale or foreclosure

THE BASICS

What is a Short Sale?

When a seller owes more on a home than it is worth (i.e. what a buyer is willing to pay), and tries to sell the home by asking their lender to take less than they are owed.  This is a short sale.  The word “short” in “short sale” has nothing to do with the time frame it takes to complete the process!  

A common point of confusion  is with short sales and pre-foreclosures.  A pre-foreclosure begins when an owner stops paying their mortgage and the lender begins the process of foreclosure (In Florida, this is kicked off with the filing of the Lis Pendens).  However, these two statuses are independent of each other.  A short sale isn’t necessarily a pre-foreclosure and vice versa.  

What is a Foreclosure?

Technically, foreclosure  is the legal process used by lenders to take back properties from owners who are no longer paying their loan (mortgage).  But, the term “foreclosure” (other terms: Bank-owned, REO, etc.) is also used to describe properties that are owned by a lending institution. 

THE WHY

Reasons to purchase a short sale or foreclosure

Many times buyers think if a property is either a short sale or foreclosure that it’s automatically a good deal. 

This isn’t necessarily the case… 

Oftentimes, in areas/price ranges that have low inventory, I’ll see buyers get in to bidding wars and end up paying more (effectively) than they should.

That being said, there are definitely opportunities (if you understand the marketplace and have a firm grasp on the condition of the property and what it will cost to renovate) to pick up good deals that are either short sales or bank-owned properties.  The reason is simply that banks are making decisions on selling these homes en masse.  Often times, they will overlook things in their decision making process which allows for a buyer to pick up a pretty decent deal.  

The other issue that creates opportunity for a deal is the fact that these homes can sometimes sit vacant for years before coming on the market.  When things go wrong and there’s no one there to fix them, deferred maintenance can turn in to major repairs.  Requiring that these houses be sold at a significant discount.   

Reasons not to purchase a short sale or foreclosure

Do you have a time frame?

Do you like inefficient processes?

Do you want to do work to the property?

Are you using FHA or VA financing?

If you answered No, Yes, Yes, No then you’re a prime candidate for buying a short sale!

Okay, so I’m sensationalizing it a bit.  I have worked on short sales that took about a year to get closed though.  So, patience is a virtue when it comes to dealing with short sales.  

Foreclosures aren’t quite as bad because you’re dealing directly with the decision maker.  They can still be frustrating to purchase because banks are large institutions and often times add (unnecessary) steps to the process.  That being said, buying a foreclosure is a much different (easier) process than buying a short sale.  So, we’ll focus on short sales… 

I mentioned FHA and VA financing types.  The reason > their appraisal guidelines are more strict than guidelines for conventional appraisals.  The issue is – if something is required to be fixed by the appraisal and the lender is selling “AS IS” – you have a slight problem.

SUMMARY

In conclusion, if I personally were buying a home I wouldn’t get too caught up in trying to buy a short sale or foreclosure.  A good deal is about the numbers…  Not who owns the property.

If you need some help in finding the right home, check out this article on real estate representation.   

And, feel free to use 904Living to search for homes!

Cheers :)

 

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