Short Sale & Foreclosure 101

Many people ask what the difference is between a short sale and a foreclosure. Here it is nice and simple in 2 real world examples…

Short Sale: someone would like to sell their home but it’s now worth less than what is still owed on the mortgage. IE: Bill wants to sell his house but it’s real market value is now only $250k. He still owes the bank $290k. He is “upside down” by $40k on this property. Since Bill doesn’t have the finances to cover this loss, he now has to “sell short”. In other words, ask the bank to cover the loss. These deals can get very sticky as there are often 2nd mortgages on the home, unpaid bills, etc that all need to be settled prior to this property transferring ownership. They also have a reputation for taking some time but that is not always the case. 

Foreclosure: This is when someone has already lost their home to the bank, typically due to not paying the mortgage. IE: Bill lost his job and could no longer pay the mortgage on his home so he therefore let it go into the foreclosure process. This process often takes a minimum of 6 months, sometimes up to 14-16 months.

Both can be great deals but it’s always buyer beware. Neither will come w/ disclosures or guarantees. If you plan to buy a short sale, make sure it’s already bank approved or listed with a very experienced short sale broker that can get the job done in a timely fashion. Otherwise, these transactions can take many many months to mature. This could tie up your earnest money and stop you from moving forward on other opportunities. Foreclosures are easier in the sense that they are already controlled by the bank. Some banks still take quite a bit of time to respond to offers, but many now have faster processes in place for this. Be prepared for some handy work as the homes are often left in marginal to poor condition. If you have the stomach, these can be great opportunities for the right buyer.