Benefits Of Short Sale Over Foreclosure
No homeowner, on the signing day for a new home, imagines he or she will face a foreclosure. But the economic downturn and real estate market crash combined to plunge an unprecedented number of homeowners into the distressing process of losing their homes. The foreclosure process can be long, stressful and severely damaging to the homeowner’s savings, assets and credit. It’s a frightening situation.
However, there is another option for some homeowners. A short sale is a transaction in which the bank lets the delinquent homeowner sell the home for less than what’s owed. The borrower finds an agent and puts the house on the market, often at a substantial discount. The hope is that, if the home sells, the lender will recoup the majority of what the homeowner owes. This saves the lender the expense of a foreclosure suit and the possible long-term cost of owning a hard-to-sell foreclosed home .
A short sale doesn’t absolve the borrower from the debt he or she incurred with the original mortgage, but it can be better than a full-on foreclosure.
Let’s take a look at 10 reasons why a short sale may present a better option than letting your home slide into the long, draining process of foreclosure.
What Are Reo Properties
Real estate owned properties, or REO properties, are houses that have been seized by banks or other lenders from people who are unable to pay their mortgages. Essentially, its a foreclosure that has been seized by the bank. When real estate lenders offer mortgage loans, they see them as an investment, because they will earn money from the interest on the loan. So to salvage their investment, banks foreclose on homes with unpaid mortgages and sell the properties at a foreclosure auction. If a home doesnt sell at auction, it becomes an REO. Theres a subset of REO properties that are owned by the government. They are called Hud houses, and they often sell well below to eligible participants.
Get A Home Inspection
Once again, keep in mind that youre buying a foreclosed home as-is. This means no one on the selling side is going to pay for any needed repairs. These repairs are your responsibility.
Because of that, its very important that you inspect the property as part of your offer process. And if the home inspection uncovers too many problems or problems that cost too much to fix, you might want to pass on buying the home.
Banks or government agencies will usually allow for an inspection contingency as part of an offer. This means you have the opportunity to order a home inspection after your offer is accepted but before the sale closes. Your home inspector will tour the residence looking for everything from leaks in the roof to evidence of a shifting foundation.
After the inspection, youll receive a written report detailing the inspectors findings. Youre able to walk away from the sale if there are too many problems. Foreclosed homes tend to offer little to no room for negotiation no matter what the inspection reveals.
Again, expect to spend more money on repairs for a foreclosed home. To get a better sense for the houses current state, find out how long its been unoccupied and determine if the previous homeowner performed routine maintenance on the home.
Its also a good idea to check with your local building department to find out if there are any open building permits that could present issues post-closing.
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What Is A Pre
With home prices rising in some areas, a pre-foreclosed home can be quite attractive financially.
When a property is in pre-foreclosure, the owner still has a chance to ward off a foreclosure by getting enough money to pay the bank or sell the property to pay off the loan.
A buyer comes in and gets a home at a discount from the full market value without the house ever going on the market, says Darren Blomquist, senior vice president at Attom Data Solutions, parent company of RealtyTrac in Irvine, Calif. It can be a win-win situation for everyone.
If they can do that, they can likely walk away with a little equity in the home and while avoiding a bad credit mark that comes with a foreclosure a mark can last seven years.
These went out of vogue during the housing downturn, but they have come back, adds Blomquist. There are fewer of them now. But since the housing market is on fire, people are looking for bargains.
Phase : Real Estate Owned
The lender will set a minimum bid, which takes into account the appraised value of the property, the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a real estate-owned asset manager. These properties are often referred to as bank-owned, and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
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Why Foreclosed Homes Are Cheaper
The biggest selling point of a foreclosed home is, of course, its marked-down priceoften significantly lower than similar properties in the same area .
Most foreclosures are sold at a sizable discount from , with the exact amount varying from region to region. The seller may offer additional incentives such as a reduced down payment, lower interest rate, or the elimination of appraisal fees and some closing costs.
What makes these properties such a deal? If the residence is in the pre-foreclosure or short-sale stage, its owners are in a financial bind, and time is not on their side. They have to unload the property and get what they can while they can before they lose possession of it.
In short, these sellers arent negotiating from a position of strength and, while it may seem cruel to take advantage of their misfortune, a buyer can benefit.
The buyer can benefit even more if the property has been seized. The sheriffs office isnt interested in hanging onto a house, and banks dont want to be in the landlord business. Financial institutions typically want to rid themselves of foreclosed properties promptly. They need to get a reasonable priceThey have to answer to their investors and auditors. Still, buyers have an edge.
You should know that foreclosed homes are usually sold as is. If theres damage, repairs by the owner arent part of the equationbut, as used-car and vintage furniture aficionados know, as is translates into a discount.
Foreclosure Definition: What Is It
When you take out a mortgage, youre agreeing to put your house up as collateral for the loan. If you fail to make timely payments, the creditor can take back your house and sell it to recoup some of their money. Foreclosure rules set out exactly how a creditor can do this, but also provide some rights and protections for the homeowner. However, at the end of the foreclosure process, your home is repossessed and you must move out.
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It Can Save You Money
The average legal cost to a homeowner going through a foreclosure is around $7,500, according to the U.S. Congress Joint Economic Committee. Add in the additional costs that can accumulate throughout the sometimes lengthy foreclosure process, which could be just the tip of a burdensome financial iceberg. And if the homeowner is unable to afford payments, the foreclosure could eventually lead to a financial situation where bankruptcy — with its significant credit implications for the borrower and costs for the lenders — is the only option .
Mortgage lenders won’t always file for a deficiency judgment in a foreclosure case. It depends on the situation and the likelihood that they can win back the amount owed on the property. However, if all sides agree on a short sale, a new buyer in a better financial state could absorb some of what the original homeowner owes the lender. This would ease the original homeowner’s hardship and put him in a more manageable position .
Likewise, a short sale can drastically reduce the amount a bank may be looking to recoup from the homeowner. For example, if a short sale lets the homeowner sell a $200,000 home for $175,000, the bank will be much less likely to pursue a deficiency judgment.
Understanding Real Estate Listing Status Terminology
It isnt only off-market that could confuse you in the listings. There are other terms like contingent and pending to understand. These two listing statuses mean that a home is off the market because a contract to purchase has been executed by both a buyer and seller.
To be able to purchase one of these properties, the sale would need to fall through.
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Hire A Real Estate Agent
Most lenders hand foreclosed properties off to an REOagent who works with standard real estate agents to find a buyer.
Not every real estate agent has experience working with REO agents. A qualified foreclosure agent can help you search for foreclosures, navigate your states REO buying process, negotiate your price, order an inspection and make an offer. Research real estate agents in your area and connect with an agent who specializes in foreclosure sales.
Preforeclosure Vs Short Sale
Preforeclosure is the first step in a foreclosure proceeding brought on because the homeowner has failed to make 3 6 months of payments. Borrowers in preforeclosure have a few options to avoid foreclosure. Borrowers can pay the past due balance in full, work with the lender to modify the mortgage to reduce their monthly payment or sell the home through short sale or deed in lieu of foreclosure.
Preforeclosures and short sales are both sales conducted by the owner or a real estate agent. Short sales can be a little more challenging because the bank is involved and has the power to reject offers that have been accepted by the owner. Having a real estate agent with previous experience with distressed properties can be incredibly helpful and expedite the purchase timeline in some cases. Banks can be slow to respond and real estate agents familiar with the process can anticipate necessary paperwork and potential problems with lienholders.
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Foreclosures Are Up 187% From A Year Prior But It Doesnt Mean What You Might Think
Most importantly, over 90% of borrowers in foreclosure have positive equity in their homes and would benefit from selling these properties at a profit rather than risk losing everything to a foreclosure auction or lender repossession, says Rick Sharga, executive vice president of market intelligence at ATTOM.
Foreclosure starts which is when the first public foreclosure notice happens have reached pre-pandemic levels nationwide, with lenders starting the foreclosure process on 23,952 US properties in August 2022, up 12% from the month prior and up 187% from a year ago according to data from ATTOM, a real estate data company.
But why are foreclosure rates so much higher right now than they were a year ago? Foreclosure statistics were artificially low during the pandemic due to foreclosure moratoriums and mortgage forbearance options. Now that those have expired and foreclosures have resumed it looks large only by virtue of the artificially low year-ago levels as the current level of foreclosures has only returned to pre-pandemic levels, says Greg McBride, chief financial analyst at Bankrate.
What to know if youre thinking about buying a foreclosure
Indeed, a home that ended up in foreclosure may have been vacant for a period of months or may have had routine upkeep and maintenance neglected for the past couple of years. Insist on a thorough inspection to uncover any problems that may not be readily apparent, says McBride.
Reasons To Buy A Foreclosed Home
Foreclosures are appealing to many buyers for several reasons, including:
- Lower prices: In most cases, buying a foreclosed home will cost you less than buying a comparable home on the market.
- Better return on investment: Because of the potential upfront savings, homeowners can invest extra funds into home improvements — which can produce a significant return when it’s time to sell.
- Fewer title issues : Bank-owned properties are thoroughly vetted ahead of time. The bank will clear the title for you, and you don’t have to worry about any issues the homeowner may have. That’s not the case with properties that are still technically in the homeowner’s possession or up for auction.
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What Are The Disadvantages Of An Off
To the buyer:
- You still have to find a property that meets all of your criteria location, features, condition and price so there may be more footwork
- Its all about who you know and it takes time to build those insider relationships
- No marketing materials means you cannot build a visual file of possible off market investments
To the vendor:
- High possibility you will get a lower price than if you advertised your property
- No chance to go to auction or leverage the enormous passive market of online viewers who regularly surf for investment or owner-occupied properties, Dean says.
- You may come out behind. It is horses for courses but the reality is many vendors think they will save a few coins avoiding advertising costs when listing off market but actually cost themselves 10s of 1000s because off market wont create the competition of a marketed sale, Dean says.
Short Sale: Selling A Home In Pre
If a loan modification cant be worked out, another step in the pre-foreclosure process may be a short saleessentially selling the home to satisfy the bills with the bank.
To negotiate a short sale, homeowners need to talk to their lender about selling their home. If the lender agrees, then the homeowners contact a real estate agent to help them find a buyer , and the bank gets to keep the money for the sale.
Almost every short sale is in pre-foreclosure, says Richardson. And short sales can be attractive to lenders as the homeowner will be doing the hard work of trying to find a buyer.
If youre able to work out a short sale agreement, and you find a buyer that garners back approval, pre-foreclosure ends. The bank doesnt have to foreclose, and you walk away with no bills .
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What Does A Backup Offer Mean
When you have been actively searching for your dream home, you may lose out to another buyer. Maybe the timing wasnt perfect, or you were outbid.
Whatever the reason, if you still have a strong desire to purchase the property, you can put in whats referred to as a backup offer.
With a backup offer, you will be in the first position to purchase the home if the contract with the first buyer falls through. Homes sales falling apart is not uncommon. For example, a home inspection could reveal problems that a potential buyer does not want to deal with.
The main reason a home sale will fall apart is inspection reports filled with unexpected issues.
A buyer may also not procure financing for many reasons, including a low real estate appraisal or credit scoring issues that did not turn up.
Phase : Trustees Sale
The property is now placed for public auction and will be awarded to the highest bidder who meets all of the requirements. The lender will calculate an opening bid based on the value of the outstanding loan and any liens, unpaid taxes, and costs associated with the sale.
When a foreclosed property is purchased, it is up to the buyer to say how long the previous owners may stay in their former home.
Once the highest bidder has been confirmed and the sale is completed, a trustees deed upon sale will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.
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What Is An Off Market Property In Real Estate
In the real estate industry, an off market property refers to a house that sells without ever being publicly marketed for sale. The seller either advertises the home privately to a select group of potential buyers or negotiates with the buyer directly without ever advertising the property for sale.
Off market property sales happen more frequently than many buyers realize. Ten percent of all sellers find a buyer without listing on the MLS, according to the National Association of Realtors 2019 Home Buyer and Seller Generational Trends Report.
However, the number of home sales that dont involve MLS listings varies tremendously by region. It tends to be highest in areas where the local housing market is hot.
How To Buy A Foreclosed Home
To find a foreclosed home, you can peruse listings of foreclosures on realtor.com®, which may also be marked as bank owned or REO. If you spot a home you like, contact the real estate agent on the listing as usual.
The biggest caveat when buying a foreclosed home is that it is typically sold as is, which means the bank is not going to fix any problems. And there may be plenty of them, considering that many foreclosures have been slowly crumbling into disrepair due to the previous owners financial strain. And unlike a traditional home sale, in which disclosure requirements force owners to reveal a homes every flaw, theres no such legal stipulation in a foreclosure. What you see is truly what you get.
Thats why foreclosed homes risk costing buyers a ton of money to renovate that could negate their supposed savings. This is why Eric Workman of the Chicago-based residential rehab lender Renovo Financial suggests that buyers take extra precautions such as the following before making an offer:
If you find out the home has problems, you will want to carefully weigh whether its worth all the extra work. In some cases it will be in others, it may be more prudent to walk.
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