Short Sales vs Foreclosuresa Distressed homeowner can decide between a number of foreclosure options. For situations where a loan work out with the bank is not possible - short sale or foreclosure may be the only two options available. While they share several similarities they have differences for both buyers and sellers.
Short Sale Vs Foreclosure Which is better?
For Sellers, neither is a good option, but I believe short sales are ‘better’ because they have less impact on the seller’s credit score, sometimes the seller may get relocation assistance from the bank, and it provides a graceful exit.
For Buyers, both are good options for buyers with patience and willingness to put in some elbow grease. Short sales will be better in general for home buyers and foreclosures will be better in general for investors and homeowners who are fine with doing some construction.
Quick Refresher: What is a short sale?
A short sale is a voluntary transaction whereby the homeowner sells their property for an amount that is less than is owed on the mortgage. For example, if a homeowner owes $200,000 on a mortgage, and the house sells for anything less than that, let’s say $150,000 in this made-up example- that’s a short sale.
And – What is a foreclosure again?
In contrast to a short sale, a foreclosure is when the lender repossesses the house at the end of the foreclosure process. For many homeowners this can be a painful and drawn out process.
Short Sale vs. Foreclosure for Sellers
The Covid-19 pandemic has shown us that anything can happen and derail our carefully laid plans for employment, home ownership and retirement. If you are missing your monthly mortgage payments, and you can’t work out a loan modification or forbearance with the bank, a short sale or a foreclosure may be the only foreclosure options left for you.
Which is the better option for homeowners in crisis?
In my option, Short sales. Short sales cause less damage to a seller’s credit score (200 points or so vs 300 to 400 for a foreclosure), and in many cases, the homeowner will be eligible to repurchase another home much more quickly than if they let the property go through foreclosure.
Foreclosures stay on your credit report for seven years, short sales only hurt you for about 2 years. A credit repair company can rapidly improve your credit score after either a foreclosure or a short sale. A homeowner with a short sale can repurchase on average 1-2 years after a short sale while a homeowner with a foreclosure must wait 5 – 7 years before buying.
In my opinion also, Shorts sales are less mentally taxing than foreclosures on an emotional level.
Will the lender accept having a short sale?
Typically, a lender will choose to work with a homeowner on a short sale rather than enter the foreclosure process. Short sales and foreclosures are usually plentiful when the real estate market is very bad. In these situations banks are going to be losing money one way or another with a short sale or a foreclosure- most of the time a short sale loses them less than foreclosure. Why? because the bank does not have to deal with a hostile tenant or owner, risk property damage (I have seen a disgruntled former owner pour concrete down the toilets and drains after being foreclosed on) and the bank is less risk to suffer from vandalism from a vacant property for a prolonged period of time.
Just because the bank gives you permission to do a short sale, does not mean they will always accept a short sale offer. It is quite common for them to refuse or counter the first short sale offer. Short sales can take 3 to 6 months to 1 to 2 years. The number one reasons why a bank turns down a short sale offer from a buyer are that the sale price is too low, if this happens you can always relist the property and try to sell it again for a price the bank is willing to accept. If you are not in financial distress or have too many financial assets, the bank may refuse to allow you to short sale.
Short Sales vs. Foreclosures for Buyers
Which is the better option for buyers?
To be honest, both Shorts Sales and Foreclosures are great options for intrepid buyers. Unlike a standard sale, these are distressed sales and can be trickier than a normal transaction between just a buyer and a seller- because the bank is involved. Short sales and Foreclosures usually sell for a discount to the market value of a comparable home for various reasons:
- Slow Sale Time.
- Poor Property Condition.
- Difficulty or not allowed to Show.
- Poor property presentation.
- Some Seller Side Closing Costs pushed onto buyer.
Is there bigger discounts for short sales or foreclosures?
I don’t really see a difference- you can get great deals on either or end up paying the market value or more with competitive bidding. If the bidding is mostly investors and not owner users, which is often the case for structural fixers rather than cosmetic fixers, there will be a top number which most investors will not bid above or buy if not below. For home buyers they may be fine paying the full market value if they really want that particular home.
Which is faster? Short Sales or Foreclosures?
Saying short sales or foreclosures are fast is not really true. They are both somewhat slow. Foreclosures with a responsive bank will be the fastest, but with an unresponsive bank, they can take just as long or longer. Short sales with an approved short sale price will be as fast as a foreclosure with a responsive bank both taking about 30 to 60 days. Otherwise, expect 2-3 months waiting on average for foreclosures and 3-6 months on shortsales.
Are Short Sales or Foreclosures Safe?
They are both very safe. You can get title insurance on either one so that offers a lot of protection. What you don’t get is some customarily seller side closing costs to be paid by the seller and is pushed onto the buyer – mainly retrofit, any termite, and forget a home warranty. Sometimes you can negotiate one from the bank but the bank is not like a normal seller. They are a big corporation, so don’t take negotiating with them personally- they certainly aren’t.
However, there are still risks. Sometimes these properties can have defects on title such as a second mortgage or HELOC for short sales or HOA liens and property tax liens against the property. With a short sale- the second mortgage holder must also agree to the short sale and may make the deal difficult or block the sale if desired. I’d say the buyer’s biggest risk is wasting a lot of time and not getting the property. This can be a market risk if the market is starting to make a turnaround because the time it takes to find out 6 months later the prices may now be higher.
Some short sellers may have deferred maintenance on their homes or foreclosures that are in bad condition. Short sales are usually in better condition than foreclosures. If a home was neglected or sat vacant for many years, which is often the case for foreclosures they can require more structural repairs. I find with short sales since the seller is still living in the home, that they are in better condition.
While with short sales you get possession fairly easily when the seller moves out- if a foreclosure has an occupant, either a former owner, a hostile tenant, or a squatter, the bank will not evict them or deliver the home vacant. Those situations are much riskier for foreclosure buyers.
For all parties involved – homeowners, lenders, and new buyers – short sales are usually preferable over foreclosures. If you are finding yourself in a sticky financial situation, please contact an experienced short sale real estate agent immediately to negotiate terms on your behalf with the bank and avoid being foreclosed upon. If you’re a buyer who is buying a short sale, contact a short sale buyer’s agent to gain personal and insightful advice on purchasing these kinds of properties.
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