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Should you buy a Short-Sale or a Foreclosure?

Bargain-hunting is the name of the game in free market capitalism.

We hear so much today about the number of short sales and foreclosures that it’s natural to wonder if this is where the bargains are.  Are these areas that we should be pursuing?  Will we get a “great deal”?

First, let’s go over the difference between a short-sale and a foreclosure.

A short-sale simply means that a seller is offering his home for sale – and that he owes an amount greater than the current value.  So if the value of a home is currently $100 and the seller owes $105 – he will, upon the closing of the sale, come up five dollars short – hence the term short sale.

Contrary to what you read, being in a short sale position does not always mean that the seller is in danger of having the bank take his home away.  It could simply mean that the owner wants to sell his home for a new job, or because of a growing family or other reasons. He may indeed have the five dollars he needs to make up his shortage and thereby can pay all that is owed at the time of the sale – even though he will be taking  a loss.

The short-sales that we hear most about in the news are the homes where the owner owes more than the value of the house and is being forced to choose between selling and having the bank take the house away because he is behind on his payments with no resolution in sight.

These sales are very cumbersome and time consuming.  If you need to purchase a house because you have a need to move into it quickly, you should probably not consider this option.  The sale price must first be negotiated with the seller – and then, if the price is less than the mortgage amount, it must also then sit subject the approval of the lending institution.  The lender may not only want to recoup the amount that they are owed on the mortgage but also any late fees and penalties that have accrued.  So once you bid, you simply have to wait- and wait – and wait.  The time frame before the offer is approved can run into months.

Aside from the monetary approval, during the course of the sale, other liens may surface. If there are other debts on the property that have had liens taken out – the additional amount of these debts must be paid off before title can pass to a new owner.

This is not to say that there aren’t some bargains in short sales but if you choose to pursue this avenue you need to go into it with your expectations set accordingly.

Foreclosures are typically a cleaner transaction.  Once a home has gone through the foreclosure process, the original home-owner is not involved. The bank now owns the property and only their approval is necessary.  The listing Realtor, represents the bank – not the original homeowner. So should you choose to make an offer, the listing Realtor will present the offer and the bank will respond.  It can still take a bit of time – but we’re usually talking weeks as opposed to months as can happen with short-sales.

The question is – how much of a bargain will you get on a foreclosure?  Here are some of the things to consider.

If the original amount of the mortgage was 90-100% of the value of the home – at the time it was purchased – and that value has declined by 20% in the last few years – the bank could be looking to collect an amount that far exceeds the current value. PLUS, in addition to late fees and penalties (the same as with short sales) there will be administrative costs and legal fees that the bank incurred during the foreclosure process.

If the home was foreclosed on more than a few months before you are making a offer – the bank also has been paying land taxes as well as  utilities, in some cases. They will likely want to recoup that money as well.

Also – depending on how long the house has been vacant, the condition of the home may not be tip-top.   There are cases where frustrated homeowners on the verge of losing their house, abandon it  – even before the foreclosure.  If the house was abandoned, for a lengthy period of time , there could be freeze damage, burst pipes, ruined floors,  vandalism and a host of other issues. Remember, if they abandoned the house before they were forced out, the house could have been vacant for some time without the bank knowing so they would not be protecting the property by keeping utilities connected or “winterizing” a vacant home.

So if you do ultimately purchase the foreclosed home, you have to mentally add the cost of making the home habitable to what you paid.  Whether you are buying it to live in or as  investment, you still must being the house up to a certain condition.  So if you could save 50K by purchasing a foreclosure and you have to put 40K into it, you’re savings is 10K.   Still a deal, but is it enough of a deal to make you happy.

Lastly, keep in mind that unless you are paying cash, you’ll have to get your own lender to approve you for a loan to buy the house. You may have great credit but remember that a lender looks at your credit and also at the value of the home you want to buy.  When they do an appraisal – it has to present at the value you are buying the house for.  Otherwise, they’ll be lending you more than the value of the house and you will instantly be “upside-down” – the bank won’t do that.

Seeking to buy foreclosures and short sales is becoming more popular for folks looking to get a great deal.  It certainly is possible to accomplish this but it’s important to educate yourself on this issue in detail as to what is a great deal and what is not.

So, talk this over with your  Realtor who can give you some specifics on what properties are available in your area and how best or proceed.

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