Foreclosure Vs. Short Sale

BirdhouseJanuary is when the buyers start looking at houses and everyone is looking for a bargain and there are plenty of bargains. 

Foreclosures can be a good value, they can also be money pits that cost more to repair than they are worth once they are repaired.

Short sales almost always look like the best value for the money and buyers flock to them.  A short sale happens when the bank that hold the loan on a property will accept less than what is owed on the home as a payoff for it and can be an attractive option for sellers who don't want to go through foreclosure. The seller comes out of it will a lower credit score but usually they come out better than they would if they went through a foreclosure.

When it comes to buying one of these homes it is very different from buying a bank owned foreclosure.  For one thing even though the home is listed at a certain price on the MLS there is no way to know what price the bank will accept and the bank has the final say.  The seller can accept an offer but it is subject to bank approval. 

Even if the buyer offers the asking price or above the bank may not approve the offer.  Instead they may wait for a higher offer or get a new price opinion and list the home at a higher price.  If they do accept the offer it can takes months to get a yes from them. Often buyers with draw their offers before there is any answer at all and move on.

Some of the Realtors who list the houses are short sale experts but that doesn't help the buyer. The truth is even an expert has no control over the bank and they don't really know when the bank will give them an answer.  It isn't at all uncommon for the agent to say that it will go quickly but the buyer waits and waits.

Most of the homes listed as short sales go into foreclosure.  Some get sold and actually close but not very many.  There are success stories out there but there are far more stories of buyers who just gave up and moved on and homes that went into foreclosure.   Once they get to the foreclosure stage the bank owns them and they are much easier to buy and usually even less expensive.  The banks are not much fun to do business with but they will sell and often quickly.

I am finding more and more short sales on the market and often have to explain what they are to buyers who get excited about the price.  In the public MLS systems it is hard to tell if a home is a foreclosure or a short sale. One way to tell is to look for phrases like "subject to bank approval".

There are plenty of bargains out there.  Buyers who want to take advantage of the 8K tax credit should avoid short sales, in favor of homes they can actually buy and close on before the tax credit runs out.

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5 Replies to “Foreclosure Vs. Short Sale”

  1. Thank you for clearing this up. I have been reading quite a bit about short sales but was a little fuzzy on the concept. You explained this very well.

  2. We have had the problem down here in South Florida that sellers price the short sales so below market value just to attract buyers. Then the buyers make an offer and wait for months to hear back from the bank only to get a counter offer of a much higher price.

  3. Teresa boardman says:

    when looking for a home don’t look for a type of sale or who owes it. Look for the home that meets your needs and is the best value.

  4. In Arizona, banks started to work better with us. We are seeing more short sales on the market than foreclosures, and they are actually closing. One thing that some real estate agents do that I always warn about is listing the house for a much lower price than the comps show should be, just to get offers in. Buyers get so excited because they see a great bargain, and then I need to explain to them that banks will do a BPO or an appraisal and they will not accept a price that is much lower than the BPO or appraisal. The price needs to be “reasonable.” Anna

  5. I would not avoid a purchase of a short sale, just because it’s a short sale. In fact I help buyer through the process the key is know the process and setting realistic goals. It’s not a quick and easy process at all, it can wear you out, but it’s worth it if you know how to navigate through it. That being said I still think an investor can get a better deal doing a short sale, and a homebuyer is better off buying a foreclosure. Why because a foreclosure is more likely too close.

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