Difference Between Short Sale and Foreclosure

Reader Question: What is the difference between a short sale and a foreclosure?

The difference is that a short sale is a technique used to avoid a foreclosure. So they are two separate but related things.

Through a short sale process, the mortgage lender agrees to accept less than the full amount the homeowner still owes on the mortgage. They do this to sell the home quickly and cut any further losses. The first question most people ask is, "Why would a lender accept less than what is owed to them?" Here's the answer:

The lender has two motivations: (1) to get the non-performing loan off their books as quickly as possible and (2) to avoid a full foreclosure process (which can be expensive and time-consuming). Selling the home for less than market value is a way to expedite the sale, because investors are quick to snatch up such homes.

The homeowner's motivation, of course, is to avoid having a foreclosure on his or her credit (which will make it harder to get a loan in the future).

So the short sale is used so that both parties may avoid the headache, hassle and expense of a complete foreclosure. In such scenarios, it's the closest thing to a "win win" that both parties can achieve.

The Listed Price of a Short Sale Property

Reader Question: If a home with a short sale is listed at 3500 is that all I would have to pay?

With short sales, closing costs may still apply, as they do with any other home purchase. So there could be other costs beyond just the listing price. The thing to realize with a short sale is that the mortgage lender typically calls the shots. In a normal real estate transaction, you would be able to negotiate directly with the seller -- for example, to negotiate who is going to pay the closing costs.

But with a short sale, the seller's lending institution will make many of those decisions. If a lender refuses to pay for some of the normal closing costs like transfer taxes, then you might have to pay for that out of pocket.

Short sale properties are typically sold "as-is" too. So you may incur some fix-up costs after the sale.

Aside from these (mostly obvious) add-ons, you typically won't encounter any hidden fees on a short sale property. The lender wants to sell the property as quickly as possible, they won't play any games like that -- they should be pretty straightforward.

Negotiating the Price of Short Sale Properties

Reader Question: If a property is advertised for short sale can a home buyer get the house for less than advertised amount?

[For those of you not familiar with this topic, you may want to start with this overview of the real estate short sale process.]

Yes, it's possible to purchase short sale properties for less than the advertised amount. However, you may not have as much negotiating room as you would when purchasing a regular listing. Here's why.

A short sale is a preemptive alternative to full foreclosure. When a homeowner is unable to make the payments on a mortgage, they will face a foreclosure. To avoid this, some homeowners use the short sale strategy, in which they list and sell the property for a very good price, typically less than the true market value.

In most cases, however, the homeowner must get approval from their lender before selling the home in this fashion. After all, the lender is going to accept a payment for slightly less than the loan balance (in many cases), so they have to give the green light for a short sale process.

That's the first reason you may have trouble renegotiating the price lower -- the homeowner and listing agent typically cannot make such decisions on their own.

There's another reason why you may not be able to negotiate the price of a short sale property. It's already favorably priced, relative to the local real estate market. So the listing agent and homeowner will be fairly confident that the home will sell quickly. That's the whole point behind the strategy of short sale properties.

Of course, all of this depends on how active your local real estate scene is. If you're in a slow market, where listed properties tend to "linger" a while before being sold, then you will have more bargaining leverage. Remember, the mortgage lender wants to get the non-performing / defaulting loan off their books as quickly as possible. If they feel the market is slow and offers are few and far between, they'll be much more likely to entertain a lesser offer.

So while it's possible to negotiate a short sale price even lower, it all depends on the market and the lender. In a market where short sale properties are selling like hot cakes, the lender will be less likely to lower the price anymore than it already is. In a slower market, the lender will entertain such offers.

It also helps to have some documentation as to why you are offering a lower amount. "Because I want to save money" is not a proper justification. For example, if you can cite some damage or disrepair (or anything that else that negatively affects the value), then you'll be taken more seriously.

Hope that helps!

Related articles:
What is a real estate short sale anyway?
The foreclosure buying toolkit

The Real Estate Short Sale Explained

Lately, we have been receiving a lot of home buying questions about the real estate short sale process. Actually, the questions are coming from two groups -- the buyers who view it as a possible investment opportunity, and the sellers who view it as a way to avoid foreclosure.

Both sides are correct. When used properly, a real estate short sale can help the homeowner in financial trouble avoid a home foreclosure. The short sale can also be a good investment opportunity for the savvy investor who knows how the process work.

So what is a short sale anyway, and how could it possibly help the lender, the homeowner and the buyer at the same time? This is a question we have addressed in a new article posted to Foreclosure City. Check it out below:

What is a Real Estate Short Sale Anyway?

Of course, it's not all sunbeams and rainbows. As with anything else in the world of real estate (sadly), there are people out there who take advantage of homeowners in financial distress. So here's my take on the subject...

Yes, the short sale process can help certain types of homebuyers in certain situations -- such as those who are facing foreclosure with no hope of getting caught up on their mortgage payments. But this type of process also attracts some sharks, so you need to be a smart consumer ... and that means doing plenty of research.

Here are some places to start your research:

• Wall Street Journal weighs in
• Washington Post offers some insight

Short Sale 101 - Buying a Home Through Real Estate Short Sale

Article summary: An explanation of real estate short sale techniques, from the perspective of the home buyers. How this technique relates to buying a home.

The short sale has become an increasingly popular real estate tactic in recent years. But what is a short sale and how can a home buyer use it purchase a new home? These are the questions we will answer in today's article.

First, let's start off with a basic definition of the short sale as a real estate selling strategy:

Short sale - (noun), A real estate sale where the sale price is less than what the seller still owes to the lender via the mortgage loan.

In other words, the seller will sell the home for less than what he or she owes to the lender, and the lender will agree to accept this amount from the homeowner and "forgive" the remainder still owed. That is the basic definition of a short sale in real estate terms.

A Way to Avoid Foreclosure

The question most people have is this. Why would a lending institution accept less than what it is owed from a homeowner. Don't they lose money that way? Well, yes and no.

You see, the short sale is most often used as a way to avoid foreclosure on a home. As the name "short sale" implies, it's a way to sell the home quickly when the homeowner is in financial trouble and facing foreclosure. Thus, the short sale is one of several ways a homeowner can avoid foreclosure on the home.

Mortgage lenders will also want to avoid foreclosure, as much as possible. Lenders are in the business of loaning people money -- they are not in the business of managing properties, marketing them, selling them at auction, etc. These cost the mortgage lender money they don't want to spend. And that's why they often agree to accept a bit less than what is owed to them, as long as the homeowner can sell the home quickly by way of a short sale.

By listing the home below its market value, it's a safe bet that the home will sell quickly. And this is where the home buyer comes into the picture.

Tracking Short Sales for Home Buying Purposes

Many real estate investors keep track of homes going into foreclosure, because that is the first step to buying a home through a short sale (and possibly paying less than market value).

Editor's Choice - RealtyTrac

Keeping track of short sale foreclosures will open up a world of investment opportunity for you. For this, we recommend (and use) RealtyTrac. Check out their offer below! ~Brandon Cornett, Editor, Home Buying Institute




Search our list of nationwide foreclosure listings.

So whether you intend to live in the home, or turn around and sell it for a profit, it's always good to buy a home for less than market value! And who doesn't like to save money?

The key here is to know about a real estate short sale and/or pending foreclosures as soon as possible. After all, you won't be the only one trying to benefit from the reduced price of a home sold through a real estate short sale technique ... there will be others out there looking as well.

So what you need then is a service that tracks foreclosures in your area and notifies you of these investment opportunities as soon as possible. There are many web-based services you can sign up for that will do this very thing for you. But there is one that stands out above the rest, in my humble opinion. And that is RealtyTrac.

Editor's Choice for Foreclosure Tracking

If you plan to track short sales / foreclosures as an investment opportunity, I highly recommend you check out the web-based services of RealtyTrac. Like I said, there are many of these types of services out there, but this one is simply superior in my mind.

Here's what I like about it:

• The web interface is simple to use
• The foreclosure data is updated often and highly reliable
• You can set up tracking parameters and receive notifications by email
• They offer a free trial so you can "try before you buy" ... a must!

I've gushed over this service enough. There's nothing left for you to do except to try it for yourself. And what better way to try it out than for free?

Good luck shopping for real estate short sales!

-Brandon

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