In 2007, America was in a real estate bubble. The majority of Americans, especially first-time homebuyers thought that they were getting great deals on homes, while investors raked in as many properties as they could. It was only a matter of a few short years before the recession began and the housing market across the United States tanked! Banks were held accountable and quite a few people who bought real estate either had to foreclose or do a short sale to get out of their mortgage. Many struggled to keep their underwater investment properties. Foreclosures & short sales began to quickly be the easy way out of their mortgages.
Foreclosures & Short Sales
We’ve learned so much since then, but yet, sometimes properties have a selling price that seems too good to pass up. Becoming educated and gaining an understanding of how the process works for each of these situations can help you navigate through the process of a foreclosure or short sale. We will provide the understanding between foreclosures & short sales in our monthly post.
What is a Short Sale?
We bet that at least once someone has told you to stay away from short sales. If not, you’ve perhaps heard they are a great deal! Regardless, the result is this: Purchasing a short sale is a complicated process. In fact, very few short sales are completed within 30 to 120 days. Knowing whether it’s worth all of the extra work depends on the buyer’s situation.
A short sale may be the sale of property for which the lending company is willing to accept significantly less than the amount owed on the loan. For a sale to be a short sale, both of these things must be true:
• The owner must be very behind on payments that they can’t catch up.
• Usually, the housing market has gone down so much that house is worth far less than the rest of the balance on the mortgage.
In most cases, the lending company (and the homeowner) will attempt a short sale process to avoid a foreclosure. In general, there are a great number of misunderstandings around short sales. One misconception is that lenders only desire to get rid of the property and will move quickly to sell it far below the price of what it is worth. Actuality, the lender will take their time to recover their loss because they can. Keep in mind: Just because a house or property is listed as a short sale certainly does not mean the lender must accept your low offer! This is even if the owner accepts it and is exactly the reason why a short sale can be so tricky.
What’s a Foreclosure?
Foreclosure is what happens whenever a homeowner does not pay the mortgage. It is a legal process where the owner forfeits all rights of the house. If the owner can’t pay back the outstanding debt or sell the house via short sale, the property then auctioned as a foreclosure. If it doesn’t sell there, the lender takes possession of the house.
#1: Missing Payments
Everything begins when the homeowner, also known as the borrower, does not make mortgage payments on time. Generally, it’s because they can’t, because of hardships, for example, unemployment, divorce, death or medical challenges.
If you’re in this difficult situation, it is necessary that you speak to your lender as quickly as possible. There are quite a few options and compromises to keep you in your home. The foreclosure process costs most lenders a ton of money and resources. They would rather work something out and avoid this process just as much as you do.
Sometimes, a borrower might intentionally stop paying the loan because the property may be underwater. In simple terms, the amount of the mortgage exceeds the property value.
Whatever the reason, the end result is that the borrower cannot meet the terms of the loan.
#2: Public notice
After a number of missed payments, the lending company records a public notice with the County Recorder’s Office. They will indicate that the borrower has defaulted on their house mortgage. In a few states, it is called a Notice of Default (NOD); in others, it’s a lis pendens – Latin for “suit pending.”
Depending on your state’s law, the lending company may be required to post the notice on the front door of the house. This official notice makes the borrowers aware that they are at the risk of a pending foreclosure to the property. It also shows them they may end up being evicted from the premises.
After receiving a Notice of Default (NOD) from the lender, the debtor enters a grace period also known as pre-foreclosure. During this time period (from 30 to 120 days, based on local regulations) the borrower may work out an arrangement with the lender with a short sale or payment of the amount owed.
If the borrower takes care of the default during this period, foreclosure ends. The borrower will avoid home eviction and the sale. If the default isn’t paid off and the foreclosure will continue.
#4: Foreclosures Auction
If the default isn’t remedied by the deadline, the lending company sets a date for the property to be sold at a foreclosure auction. The Notice of Trustee’s Sale (NTS) is documented with the County Recorder’s Office. They also send notifications to the borrower and post on the property and publish in the newspaper. Auctions can be held on the county courthouse, in the trustee’s office, at a convention center, and even at the property’s address.
At the auction, the house is sold to the highest bidder for cash. As the pool of potential buyers who are able to afford and pay cash for a house is limited, many lenders make a contract with the borrower to take the property back.
If a third party will not purchase the property or home at the foreclosure auction, the lender company takes ownership of it. It is what is known as a bank-owned property.
Bank repossessed properties are sold in two ways. Frequently, they are listed and sold by a local real estate agent. The MLS system and Zillow.com lists bank-owned properties. Some lenders prefer to list them themselves, also known as Real Estate Owned (REO). These are called a bank-owned liquidation auction and are frequent so they can get rid of them as soon as possible.
Short Sales vs. Foreclosures
In conclusion, having neither foreclosures & short sales on their hands is very good. They are not an easy way to avoid paying your house debt. It is the worst case for a seller who would like to get rid of their house mortgage and start fresh.
If a short sale has to take place, the home should be worth far less than the total amount the homeowners owe. They must be behind on payments to the mortgage and believe that they cannot catch up. Potential buyers will deal with sellers / real estate agent during the short sale process. Each of the details around the short sale process must be reviewed and approved by the lending company. Short sales cannot happen unless the lender checks off on the sale. Everything would depend on the lending company. The process can be lengthy and unpredictable even if the homeowner agrees to sell to a potential buyer and their terms.
In a foreclosure situation, the bank or lender takes ownership after the buyer is unable to make payments. This method is initiated by the lender. The bank will force the sale of the home in order to recover the original loan amount. If the homeowners are living in the house, they will be evicted during the foreclosure process. The loan provider will then attempt to sell the house either an auction or through a real estate broker. The foreclosure process normally takes less time compared to a short sale. Most lenders need to liquidate the home as quickly as possible.
Which Is Better Between Foreclosures & Short Sales?
For homeowners, a short sale is typically better than a foreclosure because of two reasons. First, a short sale can be voluntary while a foreclosure is forced. Second, after a foreclosure or short sale, many people are required to wait seven years before obtaining another home mortgage. Most lenders would prefer a short sale to foreclosure because it enables them to recoup a majority of the initial loan. This can be done without a long and costly legal process. Generally, in most cases, homeowners and lenders will pursue a foreclosure after an effort to sell the property through a short sale process.
For more details or questions about foreclosures & short sales reach out to one of our agents. Contact us below or call (850) 792-4464. If you would like to search for foreclosures & short sales in your area click here.