Short sales, where the owner of a home sells it for less than is owed on the mortgage, account for the majority of real estate sales in the country as of this writing. The time it takes to navigate the foreclosure process has caused the sale of bank owned properties, or foreclosures, to lag, making inventory low. Buying a home under either circumstance is different from buying a fair market home.
Foreclosures are usually vacant once title reverts to the lender. The condition of the property may or may not be known to the lender as most have never seen the property. Many short sale properties are occupied by the owner of record. While the property may look well-maintained, most fixes are superficial or have been done with little expense.
An REO property is priced under that of a short sale. Often, everything has been ripped out of the house and the lender has done minimal remedial work. There is no seller’s disclosure statement. Most foreclosures have been sitting without the utilities turned on, resulting in damage to the systems and growth of mold. Short sales are priced between REOs and fair market sales. While most are listed “as is,” it’s a plus when the owner still lives in the home and maintains it, even minimally. A buyer of either a foreclosure or short sale must obtain an in-depth home inspection. It’s better to purchase a property that’s being lived in.
Since the owner of a foreclosed property is an actual entity that can make decisions, buyers are in a better position to negotiate. This includes any remediation found during the property inspection, and closing costs. A short sale rarely goes into negotiation beyond the price.
Once a lender puts a house on the market, closing time can be anywhere between two weeks and 90 days. Buying from the owner, in this case the lender or investor, means you get an immediate response to your offer. A short sale takes longer, up to six months in many cases. However, the government has stepped up its regulations on lenders’ handling of short sales and has issued time constraints for lenders.
Once a foreclosed home is sold by a lender, liens are cancelled. However, be aware of a property that’s owned by a homeowners association. The association acquired it through a foreclosure for delinquent fees but its ownership doesn’t cancel the mortgage lien on the property. Buying a short sale gives the owner a clean title. A glitch can occur in a short sale if the lender doesn’t withdraw its foreclosure action against the property and an actual foreclosure goes through. The short sale buyer has recourse and won’t lose the house.
A foreclosure may come with a tenant. The new owner must comply with the tenant’s lease terms. If the tenant is on a month-to-month tenancy, he has a minimum of three months to vacate. In California, short sale tenants must vacate after receiving a 30-day notice, or a 90-day notice if the tenancy has been in effect for over one year.
- Housing Wire: REOCON 2013: An Update on Short Sale and REO Trends
- National Association of Realtors: Selling a Foreclosure? Don’t Ignore the Tenant
- Bankrate.com: Fox Business: Which to Buy: Short Sale or Foreclosure?
- Realtor.com: Buy Foreclosures vs. a Short Sale
- The Los Angeles Times: Tenants Don’t Have Foreclosure-Act Protections in Short Sales
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