Shopping for real estate may require prospective buyers to learn a whole new language. Buyers may come across certain terms they don’t understand. Among the more common terms that first-time buyers may not fully understand are “short sale” and “foreclosure.”
According to Realtor.com, short sales and foreclosure auctions are situations that occur when homeowners fall behind on payments and can no longer afford to live in a home. A short sale happens when a homeowner owes more on the mortgage balance than the market value of the property when the owner needs to sell. The homeowner can ask the mortgage lender to accept a lesser amount than the total mortgage owed — making the homeowner/seller “short” on paying the lender back.
A foreclosure is a legal process that occurs when a borrower cannot make mortgage loan payments for a significant period of time. If the debt is not recouped, lenders will step in and take ownership of the property, putting it up for sale in a foreclosure auction.
While these situations can be troublesome for the homeowner facing financial peril, distressed properties can be advantageous for buyers who oftentimes can buy homes at steep discounts. However, short sales and foreclosures are not without challenges.
The real estate experts at Zillow say that foreclosures and short sales involve more layers than traditional transactions. Zillow offers that bank lenders historically can be slow at giving approval for mortgages to purchase short sale properties or even agreeing on an amount for the sale. As a result, buyers may miss out on other opportunities while waiting for short sales to move along.
Foreclosures carry their own hurdles. Buyers may not get a chance to even see a foreclosure property, nor be eligible to have it inspected, as foreclosed homes are typically sold “as-is” and at auction. The real estate agency Re/Max says buying a foreclosure typically is faster than buying a short sale, and an investor can buy a foreclosed home for below market value. But foreclosures cannot be contingent on the sale of another home, so a buyer must have funds in place and be ready to move quickly.
Short sales are often initiated by homeowners looking to avoid foreclosure. As a result, short sale properties may be in decent condition. This may not be the case with a foreclosure. The American Society of Home Inspectors says foreclosed homes may have been neglected by having utilities turned off and no maintenance done on the home. Other homes may have been purposefully vandalized by the former owner or by squatters.
Short sales and foreclosure properties are options for buyers who want to get the best price possible on a home and are willing to take some risks in their pursuits.