Short Sales and Foreclosures
Short sales and foreclosures are the result of homeowners in distress. A “short sale” simply means the homeowner’s lender has given permission to the homeowner to sell the home for less than the remaining balance of the loan.
To accomplish this, the seller must show the lender why they are in distress, such as job loss or illness, or that home values have fallen to the point that the seller doesn’t have enough equity in the home to break even or sell at a profit. If the seller can show means to continue paying the note, it’s unlikely the bank will grant a short sale, but if it appears the seller is about to default, the bank may agree to a short sale in order to minimize its losses.
The terms of the short sale allow the seller to walk away from the mortgage while avoiding foreclosure, but the loss to the lender will be reflected in the seller’s credit report, possibly delaying their ability to repurchase a home in the near future. At the least, the next lender will require more down or demand a higher interest rate.
Once a homeowner defaults on mortgage payments, the bank begins foreclosure proceedings. The homeowner has many chances to stop the sale by paying the amount owed, until the home is put into a public auction. At that point, the homeowners loses all ability to retrieve the home. If the home does not sell at auction, it’s taken back by the bank as an “REO” which stands for real estate owned. The home then becomes an asset holding of the bank. REOs are managed by asset managers who are employed or contracted by the bank. REOs are put on the open market, often with a real estate professional who specializes in distressed sales. Foreclosures that are purchased this way typically are sold “as-is,” which means the bank has no intention to make environmental or structural repairs. So, buyer beware. When a buyer makes an offer on an REO, the asset manager decides whether or not to counter or accept, and strives to get as close to or above the original loan amount as possible.
The Price of a Bargain
While short sales and foreclosures can be bargains to buyers, they don’t come without a price. Because the lender is losing money on both short sales and foreclosures, the process to buy these homes takes longer and offers no guarantees to buyers. The length of time they are on the market, deferred maintenance, and stigma hurts surrounding home values, as much as 20 percent, according to the National Association of REALTORS®. Buyers should know that building equity takes time, and that the best home to own is the one you can comfortably afford.