NEW YORK (MainStreet) — Everyone knows what a home foreclosure is, and after three years of bad news in the housing market, most people have also heard of a “short sale.”
Both involve sellers who are in trouble, and both can produce bargains for savvy buyers. But there are some critical differences that make a short sale much trickier for the buyer than a sale out of foreclosure.
In a foreclosure sale, the buyer deals with the previous owner’s lender or the servicing company that received the former owner’s monthly payments. After the buyer has defaulted, or stopped making payments, the lender or servicer takes possession and sells the property.
A buyer may get a good deal because the lender doesn’t want the expense of maintaining the property until housing prices improve. Buying a foreclosed property is pretty much like a normal home purchase.
A short sale also involves a troubled property, but in this case the owner still has possession of the house, even if the foreclosure process has already begun. In a short sale, the lender or servicing company has agreed to take less than it’s owed. The homeowner, for example, may still owe $300,000 on the mortgage, but the lender is willing to consider the debt paid if it gets $250,000. A short sale is less damaging to the homeowner’s credit history than a foreclosure.
In a typical case, the lender has concluded the home cannot be sold for enough to pay off the mortgage, and that it’s easier to allow the homeowner to conduct the sale than it would be to foreclose. The short sale also allows the homeowner to stay in the home, hopefully keeping it in better shape than if it were left vacant while awaiting a sale out of foreclosure.
Short sales can be bargains, with homes typically selling for 5% to 30% less than the current market value, says HSH Associates, the mortgage research firm.
The lender does not set the sales price, but does have authority to approve or deny the seller’s sale terms. That means the buyer has to satisfy two parties instead of just one. Until the deal is done, the buyer can’t be sure the lender will sign off on it.
“Most banks will not agree to a short sale in writing until the seller undergoes a lengthy application process and there is at least one offer on the table,” HSH says. “A property may be listed as a short sale even before the lender has actually agreed to accept a lower payoff.”
The lender may stall for months, hoping for a better deal, and may proceed with a foreclosure even after receiving a short-sale offer, HSH says. It also may require the buyer to pay administration and processing fees that can come to around 1% of the sales price. The buyer also could be required to pay delinquent taxes and homeowners' association dues.
Because of all the snags, charges and delays, only about 25% of short-sale deals go through, HSH says.
Short sales are for the patient and cool-headed. They’re not a good idea for a buyer who’s desperate to own a home.
HSH recommends buyers use real estate agents familiar with the short-sale process to “help you avoid costly rookie mistakes.”
It’s also advisable to avoid properties that have more than one loan, such as a home equity loan on top of the mortgage. “Every extra loan servicer in the mix adds another layer of frustration,” HSH says.
HSH also recommends that buyers find out if the lender or loan servicer has “fully delegated” authority to approve sale terms.
Unfortunately, most loan servicers do not because they work on behalf of investors who own the mortgage. In these “non-delegated” cases, the servicer must get approval from the loan’s owner or owners, making the whole process more cumbersome.
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