Comparing the Cost of Short Sales and Foreclosures

Comparing the Cost of Short Sales and Foreclosures

Who sells the property is the main distinction between a short sale and a foreclosure. In a short sale, the lender is given permission by the bank to sell the house for less than the balance of the loan. In a foreclosure, the bank seizes the borrower’s property and makes an effort to sell it in order to recoup the loan balance.

Real estate-owned (REO) properties are those that a bank owns after failing to sell them at the foreclosure auction. Due to the bank’s absence from the property management industry, prices for REOs may be higher than those for short sales.

Find out more about the distinctions between foreclosures and short sales.

Main points

  • When a lender consents to accept less than the seller’s unpaid mortgage balance in order to facilitate a sale, this is known as a short sale.
  • Although a seller in a short sale is free to accept any offer, the sale cannot be completed until it has been approved, so it can be useful for buyers to search for pre-approved sales.
  • A bank willfully forcibly sells a property in foreclosure in order to recoup as much of the outstanding mortgage balance as they can.
  • Homes may go into foreclosure and sell for tens of thousands of dollars less than they otherwise would have if banks reject short sale offers.

The Short Sale Procedure

A short sale occurs when the mortgage lender agrees to accept less than the full amount owed in order to facilitate the sale of the property.

It typically takes a while for the bank holding the outstanding mortgage to decide whether or not to accept the short sale offer. It can be annoying to wait for a short-sale response. Some short-sale buyers have to wait months to hear back.

Watch out for prices.

Due to the attractive list price and the impression that the seller is in a desperate situation, buyers are drawn to short sales. But neither of those ideas must be accurate. Not all short-sale properties are in foreclosure, so not all sellers are in a desperate situation. Furthermore, sellers frequently list items at exorbitant prices in the hope that interested buyers will flock to them like moths to a flame.

Short Sales with prior approval

Consider looking for a pre-approved short sale if you’re thinking about buying one. If an offer has already been accepted and the buyer withdraws, the listing agent can learn how low the bank will go from this information. Banks rarely reveal a final price upfront, so the listing can only be marketed as an accepted short sale after that.

The waiting period for new buyers is significantly reduced with a pre-approved short sale. The sellers’ paperwork has typically been submitted to the lender by the time the first buyers walk away, and the lender may have been just about to approve the short sale at that point. At this point, the offers from the new buyers and the loan requirements are still lacking.

Short Sale Agreements

Any kind of purchase offer can be accepted by the sellers, but it won’t be legally binding unless the sellers’ bank accepts it. No matter what conditions are included in the offer, the bank will not accept them. Your real bargaining partner is the bank’s negotiator, not the seller. 

To determine the value of a home, banks rely on desktop appraisals and independent BPOs (broker price opinions). Banks want a fair market value even though they don’t want to foreclose. It is the listing agent’s responsibility to support the buyer-submitted price with comparable sales data.

Foreclosures are forced upon a property, whereas short sales are voluntary for the seller. Both can offer buyers a good deal on a home, but short sales can take a while to complete.

The Process of Foreclosure

Banks use the foreclosure process to try to recoup as much of the outstanding mortgage balance from a property as they can. In order to accomplish this, they typically force the property’s sale at an auction.

Should you hold off on buying a home to see if the short sale results in a foreclosure? Depending on whether the house has multiple offers, a buyer should decide whether to wait until the property goes through foreclosure and is deeded to the bank. In the event that more than one buyer has submitted a short-sale offer, the best and highest offer will probably prevail.

The buyer’s best interest might be to wait out the foreclosure if they are the only bidder and the bank is rejecting the short sale or, worse yet, not responding at all. Additionally, there is no assurance that a bank won’t reject several offers, particularly if none are sufficiently high.

When Foreclosures Turn Into REOs

Banks occasionally act unreasonably and end up hurting themselves. Banks might reject short sale offers so they can ultimately obtain the title to the house through foreclosure and sell it for tens of thousands less.

In the event that a home is foreclosed, you can look at the opening bids posted to get an idea of what the bank might do. Banks frequently set a minimum bid amount for the auction. A reasonable person would conclude that the bank does not anticipate selling the house at the auction if the minimum bid is equal to the amount owed to the bank. A sane person would simply pay off the mortgage and purchase the house from the seller if the mortgage balance was still owed.

The conclusion

If the bank rejects your short-sale offer, don’t give up. Be wise. You might get a different negotiator if you resubmit that offer. The seller’s listing agent might be able to submit updated paperwork on their behalf, which might change how the bank views the short sale file.

The bank will eventually list the house for sale as an REO if nobody else makes a higher offer. It might resurface on the market as a property owned by a bank. Purchase it from the bank if the price is reasonable at that time. At least buyers of bank-owned homes can be reasonably sure that their deals will close in about 30 days, most likely for a lot less money.

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