Better Buy: Short Sale or Foreclosure?

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.

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