Short Sale & Foreclosure: What They Mean to Home Buyers
In this time of economic downturn, foreclosure and short sale have become part of the vocabulary of homeowners and real estate investors alike. What is the difference and what opportunity does each present?
Foreclosure occurs when a default notice has been filed in public records at court. It happens when a homeowner stops making timely mortgage payments each month to his lender, and that lender gives notice. The notice sets forth that unless the homeowner's mortgage payments are brought current on the loan, the lender will sell the home in a sale to the highest bidding party after a waiting period.
The reason for the waiting period is to afford the homeowner a brief period to make missed and late payments to bring his or her mortgage loan current. State laws govern the specific time afforded. If the loan remains in default, then the resulting sale usually takes the form of a public auction on courthouse steps.
A lender may foreclose for several reasons. The most prevalent reason for a mortgage lender to file a default notice is to address past due payments (usually two to three) in mortgage payments of a borrower.Buying a Home in Foreclosure
There are several advantages to buying a home in foreclosure as a homeowner or investor. The most obvious is the opportunity to profit from purchasing the foreclosure property - foreclosure properties often sell for substantially less than non-foreclosure properties. Another advantage is that, for this reduced price, the home buyer gets all of the equity the prior homeowner developed in the property "for free".
Overall, the legal aspects of foreclosures to receive notice, make missed payments, and even cancel a sale after the fact make this option one that should be thoroughly evaluated, preferably with counsel.
Short Sales as an Opportunity
In real estate short sales, lenders agree to take less for the property than the amount owed, through a private sale transaction. The attractive aspect of a short sale for a home buyer or investor is that he/she may be able to purchase the distressed property for a price even lower than foreclosure. This is because the buyer of the home is not paying off the prior homeowner's mortgage loan in full and is not making all missed payments. From the mortgage holder's point of view, a short sale is attractive because it allows lenders to unload the property without having to deal with a foreclosure and costs of attorneys' fees, insurance, publication, repairs, and advertising.
Some lenders engage in short sales with home buyers even when a current homeowner is not yet in default on mortgage payments. For this reason, unlike foreclosure, a homeowner need not be in default status for a short sale to happen.
Overall, while foreclosures and short sales are indications of an economy in distress, they do represent opportunities for home buyers and investors alike. Those interested in investing in a short sale home or home in foreclosure would be wise to consult an attorney experienced in the area.