Short Sales and Foreclosures

Short sales and foreclosures have become extremely popular terms lately. In fact, nearly half of all listings in Arizona right now are distressed properties. Whether you work in the real estate industry, are looking to buy, or want/need to sell a home, you have heard these terms a lot lately. As much as they are used, you may not know exactly what they mean. In this article I will discuss what a short sale is, how it compares to a foreclosure and what that means to you.

A short sale is when an owner of a home negotiates with the lender that holds the mortgage to "forgive" a portion of their debt on that home in order to avoid foreclosure. For instance, let's say you owe $300,000 on your home, but the current market only demands $220,000 for it. You may try to sell that home for $220,000 if the lender will agree to take less than what the original loan amount was for. The lender will typically agree to do this when the seller can demonstrate some type of financial hardship, like if someone has lost their job.

Whether you are trying to buy or trying to sell, there are many drawbacks to a short sale. The biggest of these is time. Everyone's million dollar question is, "how long will it take to close on a short sale?" The honest answer to that question is, "I have no idea." It could be a long time. Many people say three to four months is the time expected to close on a short sale, but the truth is it can be much longer than that. There are many horror stories out there from people who waited for nine months or longer to find out that the bank rejected the sale or did not approve the price.

There seems to be some fundamental problems with the whole process and, in my opinion, reform is necessary. For one thing, the realtor and the seller set the list price of the home. The lender does not approve that price on the front end. Therefore, someone can offer full list price and the lender, after having it sit on their desk for months, can decide they are unable to sell it at that amount and cancel the deal.

Please, don't think I'm just blaming the lender here. As they say, "Don't hate the player, hate the game." As a matter of fact, individuals in the real estate industry are also guilty of questionable activities. Agents, who are hired to represent the sellers, seem to be sometimes confused about their role. Normally, when an offer is submitted and accepted the seller, an agent will place an AWC contingency on that listing. This means that this offer is being entertained and, even though the listing is still active, all other offers will be secondary or back up listings. What we often see happening with short sale listings is that the agents are not placing this contingency on the listings hoping that more offers come in that will be more desirable to the lender. Again, this seems to be a problem with the overall system.

There are many short sales listed right now and if you are looking to buy a home, you will undoubtedly come across some that you are interested in. I am not saying that you should not consider those homes, just know what you are getting into. If time is of the essence, a short sale is not for you. If you are looking for a property at a good price as an investment and do not care about the time it takes to close, then a short sale could be ideal.

Short sales are not the same as foreclosures. Foreclosures are bank owned properties or REOs (Real estate owned) as they are often called. These are houses where the owner defaulted on the loan and the lender took possession of the house. Bank owned homes are not as much of a headache as a short sale, but they can still take longer than a traditional transaction and there are some things that you will need to be aware of. You do not have to worry about the bank deciding that the list price is not enough, because in a foreclosure, the house is actually listed by the bank so the amount has already been approved. This will reduce the time it takes to close, however, you are still dealing with a lender rather than a traditional seller so they can take longer to go through the process.

Another concern with foreclosures is the condition of the property. One thing that we have found in the Phoenix area (and I'm sure is common in other areas too) is that people destroy houses when they are forced to leave. Many people strip the homes of anything functional and others purposely cause serious damage. I've heard stories of people pouring concrete down their drains before they left. You will absolutely need to have a professional inspection done before purchasing a foreclosure, because pretty much any bank will require a buyer to purchase the property with an "As-is addendum." Meaning that they are agreeing to purchase the property in the condition it is in.

Those are some of the major issues and concerns with short sales and foreclosures. There are more, but I don't get paid by the word. However, I would be happy to discuss this information with you more thoroughly. Just send me an email or give me a call at 602-478-7015 if you have questions. Keep an eye on upcoming articles about distressed properties and the steps for selling your home as a short sale.

As always, visit my website at www.robbohr.com.