The Goad Team's Blog

Foreclosures (aka: Bank Owned, REO’s) vs Short Sales

Most articles you'll find about Foreclosures and Short Sales are focused on sellers who may be losing their home to foreclosure. However, if you're a buyer looking for information on what you should purchase, we've made it easy to understand the differences between Short Sales and Foreclosures!


Aren't Foreclosures and Short Sales the Same?

At first glance, a Foreclosure and a Short Sale (or pre-foreclosure) would seem almost the same. Both of them are being sold for much less than they were last purchased, the bank gets all the money from the sale and has final say as to how much they'll accept, and both are very abundant in this market.

There are some major differences between Foreclosures and Short Sales. We have given you some of the important differences buyers should know before making any offers.


The Short Sale

A short sale is still owned by a private entity and may still be occupied, either by the owner or a tenant. The current owner is no longer able or no longer willing to make the payments, and they are probably unable to sell their home because the value of the home is now much lower than what they currently owe on their mortgage(s). In this situation, one option the owner has is to try to negotiate a "Short Sale" with their bank.

In a Short Sale, the bank allows the seller to sell their home either at or below the current market value and "forgive" the difference. For example, Sally Seller purchased her home 2 years ago for $350,000, and she currently owes $300,000. But because of the rapid decline of the market in the last year, her home is only worth $200,000, so she is unable to sell it. The bank may allow her to sell her home for $200,000 and forgive the difference of $100,000 so that she may avoid foreclosure. She can still be involved in the selling process by hiring The Goad Team of Century 21 Infinity to market the property, procure offers, etc. However, because the bank is granting her the opportunity to sell her home through the Short Sale process, the sale of her home is still subject to the bank's approval. The bank will look at factors such as the seller's financial situation and the home's current market value, and they will determine whether or not they will accept any offers that have been made on the property. So, in essence, you can make an offer on a home that is “subject to short sale approval” and wait for the bank to answer.

"SHORT" sale Time Frame

These days, a "Short Sale" can be anything but short. The time that it takes for this process varies from bank to bank, loan to loan, investor to investor, however be prepared for an average wait time of 30 to 60 Days. Because so many homes are going into foreclosure, banks
have to hire negotiators, who are inundated with files (many are handling over 100 files at a time). It can be extremely difficult for a listing agent to get in contact with their negotiator. Since the negotiator is such a crucial part of the Short Sale process, it is imperative for the listing agent to be contacting the negotiator on a regular basis so that all necessary parts of the Short
Sale can be completed.


Here's how a Short Sale works:

Sally Seller hires The Goad Team of Century 21Infinity and puts her home on the market. After she receives an offer, the offer is submitted to the bank, along with documentation that Sally’s bank wants to review in order for Sally to demonstrate that Sally indeed has a Hardship and can no longer afford to make the monthly mortgage payments, NOT that Sally simply no longer wants to make the payments. The bank(s) will obtain an appraisal or BPO to find out the properties approximate value. The Negotiator will then prepare an analysis of how much will be lost by agreeing to conduct a Short Sale vs Foreclosing on the Property. Once the bank or the investor decide if it is in their best interest they will either issue a “Short Sale Approval Letter” or Negotiate the Terms by which they will agree to a Short Sale. However it may not end there, if the loan is “backed” by a governmental organization (such as Fannie Mae or Freddie Mac) OR the loan has Mortgage Insurance then the Short Sale must be approved by the governmental organization or Mortgage Insurance Company as well.

The Short Sale process is very complicated, and takes time for approval before you can start making plans to move in! In today’s market many times a buyer is able to get a “better deal” on a Short Sale vs a Foreclosure, however keep in mind as with most other things in life, the better deal comes at a cost such as: longer wait times for approval of offers, not knowing for sure whether the bank will approve of the price or terms until after waiting for some time, etc.

Something else to keep in mind when looking at Short Sale properties, is that the listing price for a property is set by the listing agent, and in most cases has not yet been approved by the bank. So until the bank issues the Short Sale Approval Letter, it is not known by anyone just what price the bank will agree to sell the property for. If the listing agent has done their job the listing price SHOULD be at, or close to what the bank(s) can “realistically” expect to get for the property.

The Foreclosure (aka Bank Owned or REO’s)

A Foreclosure (or REO) property is completely owned by the bank. It has gone through the entire foreclosure process and is now fully controlled by the bank. The property generally will be vacant, there are no negotiators to deal with. Instead, you deal directly with the listing agent that the bank
chose as its representative. The bank has already done the ground work and has come to a bottom line price that they find acceptable. There is usually less waiting time for an answer, and once your offer is accepted, you are able to begin the escrow process. REO’s do not need to go through all of the steps for approval that Short Sales do, so it is usually a much easier process to work with. You make an offer, and if accepted you are on your way to moving in.

However in today’s market there is HIGH DEMAND for Foreclosures, as a result, the listing agent many times receives several offers and may put out a "Multiple Counter Offer" to all the parties who made offers. The Multiple Counter Offer will state that there are several offers on the property and will ask everyone to submit their “Highest and Best Offer”. So, after all is said and done, the offers many times end up being much higher than what they were originally asking for the property.

Thank you for reading our blog about Foreclosures and Short Sales. We hope you find this information valuable, and of course if your are interest in buying or selling a property, please give a member of The Goad Team of Century 21 Infinity a call at (702) 586-2772.