Short Sale and Foreclosure Facts
Dateline May 2010:
With 50% of all Loan Modifications now in default and Distressed Properties accounting for 40% of residential Real Estate transactions, Short Sales and Foreclosures should no longer be overlooked by todays savvy buyers. In fact, Short Sale transactions doubled between 2007 and 2008 and we are expecting them to double again in 2010. We are currently on track to see 6 million foreclosures on the market in June/July 2010.
So why is it that most agents will steer a buyer away from these properties? EXPERIENCE or lack there of. Let's break down the difference between a Short Sale and a Foreclosure first.
Short Sale Definition: A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. A Short Sale Listing is one where the agent knows there will not be enough proceeds to cover the lien or note.
Foreclosure Definition: Foreclosure is the process a lien holder (aka Bank or Investor) goes through to take possession of a property in which the owner has stopped making monthly payments. A foreclosure listing typically means that a bank has taken possession of the property through the foreclosure process.
aka: Bank Owned, REO or Real Estate Owned
The Short Sale Process
A Short Sale is not in its self a bargain, but rather the home now being sold at Market Value and does not have enough equity to cover the lien or note. So in theory, two homes equal in every way, but Home A has a $400k mortgage note and Home B has a $200k mortgage note, are both listed for sale at the current Market Value of $275k. Home A is a Short Sale while Home B is not.
What happens next is why Short Sales become risky propositions and often times sell for less money. In order to buy a Short Sale the buyer must enter into a binding Contract of Sale with the seller. Place money in escrow and then wait and wait and wait. Three Months, Six Months, Eight Months. How ever long it takes for the lien holders negotiator to work on the file, order BPO's (Broker Price Opinions) and Appraisals and present their report to the creditor (investor) or worse and more common, creditors as in more than one.
At some point the bank will get back to the buyer with either an acceptance of the offer (GREAT) or a counter offer (not so great). The buyer is still locked into this contract and must decide to either accept the counter offer or submit a new offer. If the buyer submits a new offer, the process has to start again. Hopefully it will not take as long as the first, but the file does have to be resubmitted to the investors for approval or another counter offer.
It is this lengthy process that causes Short Sales to sell for less than Market Value in most cases. There is high risk and low reward, but for a buyer with patience you could end up getting that $275k home for a lot less.
So why do most agents steer clear of these transactions. One word; TIME. A short sale takes so long to close that the agents working the deal have to wait upwards of 6 months to get paid. Of course at St. Lawrence Properties, this is not an excuse. In fact, we have agents specifically trained and certified to handle Short Sale transactions.
Another risk of Short Sales is that there is no real guideline for listing them. Many short sale sellers have not even been approved by their lender and in all Short Sale transactions the seller must prove hardship. If the seller has not started this process before listing the home for sale, your chance of a successful closing decreases by about 90%.
This is why it is very important that if you plan on looking at Short Sale listings, you do so with an agent trained and certified specifically for this. Your average agent is not trained to handle a transaction this complicated.
The Foreclosure Process
This process is long and drawn out. In some cases for a year or more, but most of this happens prior to the home being offered for sale. So by the time a buyer starts looking at a Foreclosure or more commonly called REO properties, this process has been completed and the transaction is much shorter and easier than a Short Sale. But lets start at the beginning, well the middle.
The Auction: After a seller defaults on the mortgage the bank will eventually take them to court and forces an auction on the property. This is where many get confused. These auctions are typically done at City Hall though some places like in NYC, they will be held at convention centers such as the Jacob K. Javits Convention Center in Manhattan. You will find both Investors and Banks at these auctions. The banks will bid on properties in which they hold an interest in and will only be out bid by an investor if the bid goes over the banks financial stake in the property.
Once the bank take legal ownership of the property and has evicted the previous owner, the property is put in the hands of a Real Estate Broker to market the property at its Fair Market Value. The bargain comes in because these properties usually have some kind of damage, are sold "As Is" and the buyer is responsible for all repairs known or unknown.
So are foreclosures a true bargain? If you are handy and plan on doing a lot of the work yourself, they sure are. Plan on hiring someone to do all that work and you should stay clear unless of course this is the only type of property available in your search parameters.
In Conclusion
Short Sales and Foreclosures are now a huge part of our Real Estate inventory and they should not be overlooked simply out of fear of the unknown. However, unless you are an experienced investor, you must be sure you are being properly represented by a Professional Real Estate Agent that has experience in these types of transactions.
Don't be afraid to ask the agent what that experience is. It is quite common for agents today to consider themselves "Specialists" in every field out there. Many of these agents have little to no actual experience. At St. Lawrence Properties, we have trained professional agents that are capable of assisting you with these highly specialized real estate transactions.
At the very least, every home buyer should look at a couple of these types of listings to see first hand what its all about before deciding to either steer clear of them or pursue them.
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