Everyone has heard the real estate terms, short sale and foreclosure. Often people confuse the two types of properties, even though they are very different. Whatever your understanding is of short sales and foreclosures, it is important to know the following basic concepts for both of them.
Short sale
A short sale is a property that is for sale and the seller is typically having some kind of financial hardship. What makes short sales very different from any other type of listing is the seller must work with the lender to get an approval before they can sell the property. The reason for this is the lender usually takes a financial loss on the property, and therefore needs to approve it.
The usual process for a short sale is a seller lists the property with a Realtor. After an offer is received and accepted by the seller, the offer is then submitted to the lender for an approval. At this point, the seller and the buyer must wait for the lender’s response, which can take up to six months or more. This is one of the biggest challenges to a short sale. Even after the waiting period, there is no guarantee that you will get the lender’s approval on the sale.
Efforts have been made in the last year to streamline the short sale process and some progress has been made. But still, short sales typically take a long time, with no assurance that a buyer will get the property. In fact, after the seller has accepted the offer and they are waiting for the lender response, many buyers wind up finding another property that they are interested in and do not pursue the short sale.
When a lender approves a short sale, this is when the buyer and seller have a valid agreement and can move forward with an escrow. At this point, you want to make sure that you, as a buyer, get a copy of the lender’s approval in writing. This will confirm the approval and will outline the conditions that the lender has made.
There are other things to be aware of with regard to short sales. Sometimes short sale listings are priced well below the market value to attract buyers. When this happens, it is not uncommon for the seller to get multiple offers. Ultimately the lender will do a market evaluation on the property to determine its estimated value. Even if a lender approves a short sale, very often the lender’s approval is at a higher sales price than what the property was initially listed for.
If the short sale is a condo or townhome, it is very common that there are back homeowner association (HOA) fees that have not been paid. Typically the bank is not willing to pay for these back fees and typically the HOA is not willing to waive them. It is often the buyer’s responsibility to pay for them.
It is very important to hire a good professional home inspector to do a thorough inspection, in order to know the condition of the property you are pursuing. Typically short sale properties are sold as is, as are foreclosures.
Foreclosure
A foreclosure is a property that has actually been taken back by the lender and is owned by them. For the most part, when a foreclosure or a bank-owned property goes on the market, the process is just like a regular listing. The typical first step to selling a foreclosure is the property gets listed and put on the market by a listing agent. Then the seller, who is the lender, accepts an offer and opens escrow.
There is no long waiting period for the lender to accept an offer. Sometimes the banks may take several days or even a week to accept an offer, but not several months like with short sales.
After the offer is accepted by the bank in writing and escrow is opened, the rest of the steps are like a typical sales transaction. However, the sellers of foreclosure properties are exempt from providing buyers with some of the customary disclosures.
There are many additional things to take into consideration when pursuing a short sale or a foreclosure. If you are considering buying one, it is very important to work with a seasoned Realtor who is experienced with them. This way you can be guided through the process with someone who is knowledgeable. Good luck and happy house hunting!
Trent St. Louis is a licensed Real Estate Agent and a member of the National, California and San Diego Association of Realtors. He can be reached at trent@tns.net or at his office in Hillcrest, The Metropolitan Group. DRE#01273643.
