You want to buy a home for less than market value, or do you want to own a second home and are looking for a deal? There are few active buyers in the real estate market nowadays but those who are seriously looking are considering short sales or foreclosures. If you are one of these people then what is better for you – a short-sale or a foreclosure?
Is a short-sale best?
Short sale signs are popping up everywhere yet many people do not know what this means. The seller who chooses a short sale is in a hurry to get out of their mortgage so the lender agrees to accept a mortgage payoff amount that’s less than what’s owed in order to help the seller get out fast. The lender ultimately forgives the remaining balance of the mortgage loan.
So who’s the winner and who’s the loser with a short sale? The person selling risks damage to his or her credit report but the damage is not as bad should they foreclose. Also, the seller will leave their home without so much as a nickel from the sale and this may cause problems looking for another place to call home.
The lender takes a financial loss, but chances are it won’t be as severe should they have to foreclose on the mortgage.
For the buyer, obviously he or she is able to secure the sale at a cheaper price but chances are the house may have a lot of problems to fix – just like those “handyman specials” that pop up once in a while. Another factor is that there is a lot of paperwork for the purchaser to get through in order to finalize the sale.
There are two situations that you must be aware of that are signals that a short sale may fail. First, lenders very rarely accept a short sale offer until the borrower has fallen far behind in their payments and they have received a notice of default. Second, if the seller has filed for bankruptcy, then avoid this short sale like the plague. Negotiating a short sale once bankruptcy has been filed is a collection activity and collection activities are prohibited in bankruptcies.
If you are willing to accept a lot of red tape and hassles in order to receive a substantial discount then this may be worth your while. Another benefit to consider is that the lender wants to continue to get paid the money it loaned, and this may open a door to some beneficial financing terms.
Now that we’ve looked at short sales, is purchasing a foreclosure better?
First of all, if title insurance is available on the foreclosed home, then most financial experts say it is safe to buy. This is essential because so long as there is title insurance then the purchaser is protected from the former owner coming back to seize the home back. (This has occurred when a lender has repossessed wrongfully.)
If a purchaser searches for foreclosures from a bank, the term for this type of home is an REO (real-estate owned by a bank). There are specialized real estate agents who deal strictly with REO properties and there is no shortage of these homes. This is good news for home purchasers.
Finding an REO property follows the simple common sense rule as everything else in life – buyer beware. Many of these homes fell into foreclosure months before they return to the market so many of them are in a decrepit state. Once a home has been empty for months, it can fall into such a bad condition that it no longer qualifies for a mortgage. This renders these homes to investors who can purchase them with cash, fix them up and sell them.
To sum up buying a foreclosed home, if you are not an investor, and do not have cash, then purchasing an REO property must be one that can be mortgaged.
Either a short sale or a foreclosed home can be an amazing deal for the right purchaser. Be sure to do your homework first when looking at a home in order to facilitate the process as smooth as possible.