From reality shows about flipping homes to infomercials that promise you’ll get rich quick, the message is the same: Buying a home that is facing foreclosure (also know as a "short sale") is a sure way to financial security. However, considering all the hype surrounding short sales, it’s important to separate the facts from the fairy tales. There are some important points to consider before you waste a lot of time chasing after these deals.
What Exactly is a "Short Sale"?
It’s when the bank agrees to accept a discounted payoff when a property sells for less than what is owed on it. Here’s how a home usually ends up in this category: - When a homeowner stops making the mortgage payment, he eventually receives a notice of default from the bank that threatens foreclosure proceedings if the debt is not cured.
- In an effort to avoid foreclosure and any more damage to the homeowner’s credit, they try to sell the home to pay off the loan.
- Most of the time, what the homeowner owes on the home is more than the value of the home. This is due to the dramatic drop in home values over the last two years. The amount owed will be even greater if the homeowner took out a second loan based upon the equity that used to be in the property when values were high.
- The bank agrees to accept the amount and consider the loan paid in full, even though it is less than what is owed.
Based upon what you read or hear, you may believe that banks are willing to take fifty cents on the dollar just to unload these distressed properties, making the houses real bargains just waiting to be purchased. Unfortunately, the reality is quite a different story. In fact, in Santa Maria, California, where about 70 percent of all listings are in some stage of foreclosure, you can’t be in a hurry if you are considering buying a short sale home. In fact, you may find that you’ll pay less for the home if you wait until the bank has taken ownership of the property.
Why Does the Short Sale Process Take So Long?
The homeowner who is facing foreclosure decides what the selling price should be for the home without knowing what the lender and loan servicer will accept. As a result, what might sound like a great price could end up being rejected by the parties who provided the loan.
When a buyer makes an offer on a home that is facing foreclosure, most of the time the bank is not the one that holds the note. The offer has to be presented to the investor who bought the mortgage-backed security for approval. According to one manager from a large, national loan servicer, the lender needs to present the loan investor with a short sale package that includes: |
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