Foreclosures VS Short Sales – Understanding the difference

An article by Stacy Barry

Everyone is always looking for a deal! So am I! However, I don’t think there is enough education out there to explain the process of purchasing a home that is listed as a short sale or a home that is bank owned. It is vital to understand the process not only from a timing stand point, but also from a lender’s view.

Unfortunately with the struggling economy the terms short sale and foreclosure have become buzz words in the real estate industry around Hamilton County – Carmel, Noblesville, Fishers, Zionsville & Cicero– no city is exempt, but what exactly is the difference between the two?

Simply put – a short sale is when a homeowner owes more on their house than it will sell for. For example: If the Smith’s owe $300K on their house, but in this market will only sell for $250K they might want to consider selling it via short sale (assuming they don’t have $50K cash to bring to the closing table). In other words, they are selling the home for “short” of what they owe – hence the name short sale. The homeowners are usually still living in the home, keeping up with maintenance, hoping to avoid foreclosure. The bank (or banks if 2 mortgages are involved), not the homeowner, has the final say in the approval of the sale price.

I find it ironic they are called short sales, because the negotiation of a short sale home usually takes months. If you are interested in purchasing a home that is a short sale, patience is a must – I’ve seen banks take 30+ days to respond to an offer and take 6 months or longer to close. If you are looking to move in the near future, I would recommend not putting an offer in on a short sale. If a home fails to sell via short sale, it will then be foreclosed on and the bank takes possession.

Before a home is foreclosed on, it will go to the Sheriff’s sale. The Sheriff’s sale is a great place to find an amazing deal on a home, BUT you must have cash in hand and have little or no opportunity to inspect or even see the inside of the home.

A home that does not sell via Sherriff’s sale is now a foreclosure. A foreclosure is a home that has been repossessed from the previous owners and is bank owned. The home is vacant, but many banks do make the extra effort to winterize pipes & plumbing and keep utilities on (heat & air conditioning) to ensure the condition of the home will not deteriorate. Unfortunately with the number of foreclosures across Hamilton County and beyond, many banks cannot keep up with the maintenance of their properties. I’ve seen many foreclosure homes with broken pipes, mold damage and/or extensive structural damage from either the former occupants or from sitting vacant without utilities. Fortunately when purchasing a foreclosed home, you can (and MUST in my opinion) hire a home inspector to do a complete and thorough inspection of the property.

Although there are quite a few great deals out there that are foreclosures and short sales, not every foreclosure & short sale is a good deal. Whether it’s a good deal or not, depends on how the bank has priced the home and unfortunately with the large number of bank owned properties many banks do not have time to “do their homework” and price the home accurately – which can work for OR against you. I want to reiterate: Just because a home is a foreclosure or short sale does not always mean it is a good deal. A quick CMA (Comparative Market Analysis) will help determine if the property is a good deal…or not. I do have access to homes that are going thru the short sale process and homes that have been foreclosed on. If you would like a list please let me know.