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Buying a foreclosure or short sale


Buying a foreclosure or short sale

Foreclosures and short sales both involve banks, yet they are very different in process. I have found this to be something that is very misunderstood so let me explain.

Short sale absolutely does NOT mean “quick sale”. The opposite, it is a very slow process. Short does not refer to time frame, instead it is talking about the payoff to the bank. So, what this means to the buyer is that it is a fairly time consuming process with an uncertain outcome. Although banks are really getting better at short sales and making it a smoother process, generally they do not pre-approve short sales (although sometimes they do, which takes a lot of the guess work out of it) so this means that the list price is not necessarily what the bank will take. The listing agent is doing their best to price it at something high enough for the bank to accept but low enough to get an offer. If you, the buyer, make an offer on a short sale they take your offer along with the sellers financials and submit them to the bank. The bank then evaluates that there is an actual financial need and they also evaluate if they believe this to be a market value offer. This can take two weeks to several months. Hopefully at the end of all this waiting the bank agrees with you as to what value is. This can be a great opportunity for equity, but it can also be a frustrating waiting game.

Foreclosures are completely different from this in that the bank already owns the home. The payments were not made and so the bank takes ownership. By the time they get this home back on the market they have already had appraisals and real estate agents give their opinion as to the value of the home. Therefore, when they get an offer they are able to respond in a day or two, not a month or two.

A couple of things that increase the cost of foreclosures:
1) Often there are no appliances in the home.
2) The bank commonly puts expenses that would normally belong to the seller and put it on the buyer. For example: putting utilities in their name for inspections, sidewalk inspection, and transfer taxes are all expenses that banks will sometimes insist on the buyer to pay. Generally, if you are planning on costs being about $500 higher when purchasing a foreclosure then you won’t be taken by surprise.

Both short sales and foreclosures can be wonderful opportunities for building equity, but be prepared for minor bumps in the road. When you see them coming you’ll get through the process and realize the bumps weren’t that bad and in the end you’ve got a great home!