Short Sale vs. Foreclosure

Q: What is the difference between a short sale and a foreclosure?

A: A short sale involves the sale of an “under water” property, whereby the proceeds of the home sale will be LESS than the total mortgage balance and the owner cannot afford to pay the balance of the debts against the property. Purchasing such a property requires that the bank agree to accept less than the amount owed on the property, releasing the lien on the property. According to realtor.org, ” A short sale is a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan”

Houselogic.com explains foreclosure as “The process whereby a lender, such as a bank, seeks to repossess a property where the owner has failed to comply with the terms of the mortgage or promissory note, such as not making a payment. Once the property has been foreclosed, the bank can then sell the house, using the money to pay its costs.”

AOL Real Estate offers an explanation to help distinguish one from the other, in that,  “Short sales can also be referred to as ‘pre-foreclosure sales’ which, as the name implies, precedes the home being officially repossessed or foreclosed on by the lender. That is, the property is sold much earlier than the months it typically takes to reach foreclosure, allowing all parties to move on from the transaction sooner.”

OK to Flip that House, says FHA

CNN is reporting that the Federal Housing Administration has some good news for real estate flippers–the investors who buy homes on the cheap so that they can quickly resell in order to turn a profit.

The news report said this of FHA: “In an effort to help stabilize housing prices and unload some of the foreclosures that are flooding low-income communities, the mortgage insurer extended a waiver of its anti-flipping regulations through 2012.”

The waiver, which was issued in 2010 and expired at the end of December, suspended regulations that prohibited the agency from insuring mortgages used for purchasing homes that are bought and resold in less than 90 days.

Acting FHA Commissioner Carol Galante explained: “This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight.”

The ban was first initiated as a preventative measure against predatory flipping, in which homes when homes are quickly resold at inflated prices to unsuspecting buyers.  However, the extension of this waiver through 2012 may offer help to many low-income communities that continue to struggle.

Foreclosures have been especially problematic in many low-income neighborhoods, causing declining property values and surges in crime and other “social ills.” In such neighborhoods, “Real estate flippers often rehab these damaged homes before reselling them, improving conditions for neighborhoods.”  FHA mortgage insurance plays a crucial role for many low-income communities.  In fact, many of the loans in these communities could not be issued without FHA backing.

CNN reports that in order to qualify for the waiver, certain conditions must be met:
  • The transaction must be “arms length” with no other relationship between seller and buyer.
  • If the new sale price is 20% or more above the previous selling price, the lender has to document and justify the increase and meet other conditions, such as making sure the home has been inspected.

The report states that, “Since the waiver went into effect in February of 2010, the FHA has insured more than 42,000 loans to purchase homes that were being resold within 90 days. These totaled more than $7 billion in mortgage principal.”

Ways Sellers Can Compete with Foreclosures

The number of home purchases involving foreclosed properties or short sales is more significant now than ever before.  However, for many would-be sellers, the idea of competing with the ridiculously low-priced house down the street somehow doesn’t sound all that encouraging.  MSN recently offered some advice to the non-distressed, above-water sellers on ways that they can compete with foreclosures.

1. Sell sooner rather than later.

We’re not suggesting that you should sell ASAP if you’re unsure about it, or if you really don’t have to.  But if you are planning on selling soon, or if you need to sell, now is the time to make your move.

“Sure, the slowdown in foreclosure activity could mean less competition now. But you should account for a boomerang effect: The number of foreclosures is expected to skyrocket later this year.”

2. Get your story out

In many parts of the country, foreclosure purchases and short sales comprise 20% to more than half of all home sales.

“If you are a long-term homeowner who has kept up on your mortgage payments, you must deliver that message. This is your key advantage over a lower-priced foreclosure, especially in light of the robo-signing mess. Buyers will know from whom they are buying the home —no title issues here. You can get this point out tactfully in your ads with phrases such as ‘long-term ownership’ and ‘been in the family for decades.’”

3. Do your homework.

Informed buyers (read: serious buyers) will come prepared with a list of comparable properties which will include any active listings or sales (standard, foreclosure, and short sales alike) in your neighborhood.  Sellers may want to, “Provide your own market analysis, which can help highlight the challenges facing foreclosed properties.”

Your market analysis, according to MSN, should include two parts: “The first report should be of comparable homes sold in the past few months, with foreclosures broken out separately…The second should detail homes on the market now. This will help you frame the decision on favorable terms: Buyers should consider homes like yours instead of foreclosures.”

4. Price aggressively without undercutting foreclosures.

Listen up: “The aim is to sell your home, maybe with a small gain. Forget about making a killing. Few homeowners who are current on their mortgage can match a foreclosure price.

However, buyers are still looking for a good deal.  MSN advises sellers to, “Look at what other nondistressed properties are selling for in your neighborhood and set your price below them. Drive home the point that the price is the price — with foreclosures, a bank can take a better offer until the day of the closing.”

5. Burst those foreclosure fantasies.

Most buyers are not completely aware of what it takes to buy a foreclosed home. Frequently, “Individual buyers don’t stand a chance because they compete with investors who are ready to pay cash. If buyers or agents don’t know this, enlighten them. There is a significant percentage of buyers (who) could not buy a foreclosure if they wanted to.”