It seems that hardly a day goes by that there isn’t a report on the news about the rising foreclosures and the current state of the housing market. While it is unarguably a great time to purchase a home, there seems to be a lot of confusion amongst buyers and sellers on what foreclosures, short sales, and REO’s mean, so here I hope to sort them out.
When you purchase a home that is financed by a lender, you sign a note and mortgage which is your promise to repay that loan. When you stop making payments on that loan, the lender can foreclose, meaning they can take the property back from you. Foreclosures can take a really long time to complete, so it’s usually at least about a year after someone stops making payments on their property until the property goes to Sherriff’s Sale. The bank typically buys it back at the Sherriff’s sale and then the property then becomes owned by the bank. The bank sells the property, known as a REO (Real Estate Owned) listing. The bank typically sells the property as-is and will not make any warranties or representations as to the condition of the property. A buyer is usually able to get a really good price on REO properties as the banks slash the list price in order to get the property to sell quickly and off of the bank’s books.
A short sale is when a lender accepts short of the balance due on the mortgage in exchange for release of title so a person is able to sell their property. This typically happens when the homeowner is already a few months behind on their mortgage, however we are seeing more and more short sales where the owner is still current on their payments but knows they won’t able to be current for much longer. Let’s say you owe $200,000 on your house, the market has declined or you took out mortgages that ate up all the equity in your property and your house is only worth $150,000. With a short sale, after buyer and seller reach an accepted offer, the offer goes to the bank for their approval. So the offer of $150,000 gets submitted to the bank, and the bank approves the $150,000 price, but technically the bank is still owed $50,000. At this point the bank will do one of a few things: 1) Sue the borrower for the deficiency, 2) Reserve the right to sue for deficiency but not actually do it, or 3) Waive the deficiency completely (basically forgiving the difference). Clearly, the third option is the best one for the borrower, and we are seeing more and more banks waive deficiency judgments completely. The beauty of the short sale is that it helps the Seller avoid a foreclosure all together, buyer gets a great deal on the property they are purchasing, and the Seller also is able to avoid the nasty impact that a foreclosure would have.
If a homeowner is late on their mortgage, or is currently struggling with their payments, it’s best that they speak with their Realtor as soon as possible. Realtors like myself, who are CDPE’s (Certified Distressed Property Experts) are extremely familiar with negotiating with banks and the intricacies of the short sale process. It is important that a distressed property owner have the best representation possible. If you, or someone you know is struggling with their monthly housing payments, please don’t wait to have them call. In the world of foreclosures, judgments, and financing, timing is everything!
