Short Sale or Foreclosure? Which is The Best Buy?

Charlotte home buyers frequently ask me, which is a better buy, a foreclosure or a short sale?  Which

Short Sale? Foreclosure?

is preferable to buy?

That’s 2 big questions, first you will need to know the key differences.   Let’s get started with the basics.

If you are buying a foreclosure, you are buying a bank-owned property, or REO. (Real Estate owned)

This could be owned by the bank itself, or it could be owned by Fannie Mae, or HUD, the companies that bought or insured the loan.  These are non-personal corporate entities, and frequently relatively easy to deal with- easy as long as you follow their rules and jump through their hoops. But you do get answers. And, the sale is being managed by asset liquidators, people charged with selling the property efficiently.

If you are buying a short sale, the property is still titled in the original owners name.

They, the Sellers, will have to submit your offer, as well as their hardship letter and financial s, to the bank, and get the the bank’s loss mitigation department’s approval, before this sale can go through. Why? Because, the Buyer offer amount is insufficient to cover the the existing mortgage, and pay all the expenses (commissions, revenue stamps etc) of sales… so, the lender will have to be willing to take less than the full note amount to satisfy the lien, and this lessser amount is the reason is is called a “short” sale. you will also be  dealing with a bank’s  “loss mitigator” as opposed to a liquidator, and it makes a difference.

What are the advantage to the Seller of the Short sale?

Primarily helping to keep their credit more intact.  The Seller’s credit will suffer with a short sale, but not like a foreclosure, which is more damaging and will hang around much longer.

Advantages to buyers...

The Advantages to a Buyer

Obviously, you can get a great house for a whole lot less than you could have a year or two ago. Home prices have already fallen back to2003 levels in most parts of the city- if you could then take another 10 or even 20% off that price- wow, that is a lot of house for Not a lot of money- that’s why they are becoming so popular among Buyers.

So Terry, Which is the better deal, should you buy a foreclosure or short sale?

If it is a house you want to live in, most cases today will favor the short sale. Why? Because if it is a nice home, there are enough buyers out there to buy it in the short sale status. As you’ll see below , that is not 100% true by any means though- because so many homes never go on the market- at all- prior to foreclosure.  Foreclosures are the easier to acquire as well- short sales require patience and the ability to occasionally wait out the bank- short sales can be time consuming, see this post on Charlotte Short Sales

What are the advantages to the bank of a short sale?

The key question, and the one the bank has to answer on each application- Would the bank do better in a short sale or foreclosure? Initially, the reason most banks accepted the short sale is that they see they would lose less in a short sale than a foreclosure.  Generally it is assumed that a short sale will cost the bank 15-18% before expenses, where a foreclosure generally runs 28% or more.  These numbers vary from market to market in a big way, depending on the direction of home prices and a number of other factors.

But here is where concerns about future home price decreases are really screaming at the banks… In states where home prices have rapidly fallen,  like Florida, Arizona and Las Vegas, the fear that a foreclosure would cost the bank 50% led to  a rush of short sales… Here in Charlotte, banks held out for awhile through most of 2008, our homes prices had not tanked yet, thinking they might get a better deal in foreclosure.

But as 2008 wore on into 2009, banks have grown more accustomed to accepting short sales in Charlotte- some pretty large one’s too on new construction particularly.

Where it was once a question of, which costs the bank less, it now has turned to something else- often, the bank owns so much real estate, the idea of more property is so distasteful that they’ll consider more expensive (shorter) short sales- and this has led to a growing number of short sales in the greater Charlotte area, many at great prices.

What IS Going on…

Tragically, many homes go straight to foreclosure without every being on the market, short sale or otherwise.  Sellers in distress, don’t understand their options, and the pro’s and cons of each.  If you can’t meet your payments and are falling behind, you can consider a loan modification if you want to stay in the house, and could pay for it if it was better loan, or, a short sale if you know you can’t pay for it and need to get out.

But as each week passes, there is more and more recognition among bankers, investors and the government, that short sales are vastly preferable to foreclosures. nationally, short sales are increasing, averaging 10-12% of distressed property sales in 2009, to 15.9% in January 2010 according  to Campbell/Inside Mortgage Financing Monthly Survey of market conditions.

A Treasury Department program, offering  a few dollars to the mortgage holders, and $1500 of moving assistance to the borrower, is likely to have a little effect around the edges, slightly increasing the number of short sales.