Advantages & Disadvantages of Purchasing Foreclosures
& Short Sales, by Experienced Realtor Jackie Reed
Overall, a short sale is a homeowner who is in the “process” of foreclosure (but not completely foreclosed yet as it takes many months to complete a foreclosure). If a seller gets a contract on their home before the full foreclosure is completed, the bank is willing to take a “hit” on what is owed on the mortgage which means that the home generally sells for less than what the mortgage balance is on the home. That is why they call it a “short” as it is a discount on the mortgage. Banks are willing to do this as it costs them a lot more to go through the complete foreclosure process.
The misconception is that a short sale is a very fast process. However, it is completely opposite of that. The short sale is a very complicated and drawn out process. It can take many months to get a bank to approve a contract on the home while in pre-foreclosure. There have been many times that a buyer (who currently has a contract on a pre-foreclosed home) has to wait many months, and then they find out the bank won’t approve their current deal as they may want more money for the home. This can be a very frustrating process, but if a buyer has time to wait, it can also be worth it if the bank approves their deal or counters close to what the buyer is willing to pay for it. That is why short sales are appealing to investors who do not plan to live in the home as they have no time constraints, but want to get a good deal. Short sales are for VERY PATIENT buyers only!
A home that has already been foreclosed on is much easier to work with. The prior homeowners no longer live in the home and no longer own it. It is now owned by the bank or similar entity. These are also called “REO” (Real Estate Owned) properties or “Bank-Owned” properties. Generally, these properties are already tremendously discounted when they are added to the MLS for sale. The asking price is usually a lot less than what the prior homeowner paid for the home or what the home is currently worth. The bank will negotiate off this price as well, but since the asking price has been discounted tremendously, they usually do not come off much more than the asking price. However, if a foreclosed home has not sold within 30 days, you’ll generally see the price is reduced around 5% per month until it sells. One thing to keep in mind, these homes are always sold AS-IS (you buy it as you see it). You are (in most cases) welcome to do a home inspection for your own comfort, but you cannot ask the bank for repairs (in most cases).
I should also mention that not every foreclosure is handled the same way. Some can get negotiated quickly, while others take days to negotiate. It really depends on the bank that you are negotiating with. Overall, buying a foreclosed home is a much quicker and easier process than buying one in a short sale (pre-foreclosed home).