Short Sale vs. Foreclosures Explained

Michigan is now ranked as one of 5 states with the highest number of foreclosures in the nation. Do foreclosures and short sales represent an opportunity for you??

What is a Short Sale?
A short sale is a when a homeowner works in cooperation with their bank to sell their home at an amount that is less than the full amount owed on the mortgage. This is common in areas where the market value has dropped so far that owners have lost all their equity in a short period of time and cannot sell their home for what they still owe on the mortgage. In a short sale, a buyer will negotiate directly with the seller, and the seller will work to obtain agreement from their mortgage lender for the sale. The lender typically forgives the debt owed by the seller or makes an alternative repayment plan with the seller.

Who qualifies for a short sale?
Typically, a homeowner must be facing foreclosure or be in a “must-sell” situation. The owner must be experiencing true financial hardship, have no equity in their home, no assets, and be in default or facing default in the near future. Although a home owner cannot have assets – assets like a 401k or retirement funds can be generally be excluded and protected. A short sale will leave a negative mark on the owners credit, but will not be as detrimental as a bankruptcy or foreclosure.

What is the process for purchasing a home subject to short sale?
Most homes are listed in the MLS and are designated as subject to short sale. Sometimes this can be a great opportunity to get a good deal on a home that otherwise wouldn’t be available for sale. The short sale process is different in every situation as the circumstances of the seller and the lending bank vary. Patience is key. Some transactions go very quickly but others come with additional requirements and a time period that may extend from 1 to 6 months before closing. It is important to work with a Realtor and your own mortgage lender who are familiar with the short sale process and can help you navigate the way to mitigage your expenses and time in the process.

What is a foreclosure?
A foreclosure is a bank owned home. The seller defaulted on their loan, was notified by the bank of the impending Sheriff’s Sale, and the bank repurchased the home at the amount that was owed. The seller often ends up filing bankruptcy and has a negative mark on their credit for up to 7 years. A buyer purchasing a foreclosure will negotiate directly with the bank, not the former homeowner.

What are the risks and benefits of purchasing a foreclosure?
Foreclosures can be priced to sell and often sell very quickly in a multiple offer bidding frenzy when they are aggressively priced. However, with a great return on investment there is also always a little extra risk. In Michigan, state law gives the owner 6 months of possession and time to look for a new home after the Sheriff’s Sale. Keep in mind the owner no longer has any ownership interest and their credit has already been negatively hit during this 6 month period while they still have possession of the home. The bank cannot enter the home to make repairs, winterize water pipes, turn on utilities, etc. until the owner vacates. Because of this, it is important to understand how home systems work and the value of repairs and inspections that you may need to put into the home. Most foreclosures are listed in the MLS and negotiating with the bank is generally a straight forward and quick process.

Short sales and foreclosures sometimes offer a great opportunity to buyers. Understanding the process, the additional fees, and the risks will help you locate and make better investments in the long run.