Your home: What’s the difference between a short sale and a foreclosure?

By Chad Taylor

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

The Taylor Made Team

A short sale is when you sell your house at a price that is less than the balance owed on your mortgage. The bank that holds the mortgage must approve the home for a short sale and will ask for documentation explaining why the property should be allowed to sell “short.” Typically the seller still lives in the home when it is offered as a short sale. Therefore a buyer’s initial offer will be negotiated with the seller first and then must be approved by the bank. So, in a sense, you are negotiating with two parties at the same time.  The bank, however, is the final authority. All terms and agreements are not final until the bank signs off. A typical short sale can take anywhere from 90 to 365 days to process. That’s right: a full year. It all depends on the lender.  The short sale market is not for the impatient or those on a specific timeline.

A foreclosure is when a lender forces the sale of a property in an effort to recover the balance of a home loan. In this situation, the homeowner has stopped making payments and is most often out of the home. This is a true bank-owned property. The bank will then order an appraisal and market the property at a price that will liquidate the asset. And to the bank, it is exactly that: an asset. There are no emotions involved at all. Most of the time, the asset manager or negotiator at the bank has never seen the home or and might not even know where Prairie Village, Kan., is. Therefore, the negotiations can be very cut and dry. A foreclosure can be processed and closed in as little as 30-45 days.

Both are more commonly known as “distressed properties” and are fortunately becoming less of a factor in today’s market. As a point of reference, in February 2009, distressed properties represented 49 percent of the national real estate market. As of December of 2012, only 24 percent of the national market was distressed properties, of which 50 percent were short sales and 50 percent foreclosures. The reduction in the distressed property inventory is a major contributing factor to the housing market recovery.

Even as the distressed property inventory declines, the HGTV generation is still clambering for them. Quite often my wife, Leah (our Lead Buyer’s Specialist), will meet new clients for the first time and they will immediately ask about short sales and foreclosures. There is a misconception out there right now that you commonly find these little “diamonds in the rough” for way less than market value and all they need is a little paint and some TLC. It is rare that a property like that is available.

Typically the home owners have been in financial difficulty for some time and most often property maintenance is the first expense that they eliminate from their budget. So the homes are usually in disrepair and some are uninhabitable. If you are an investor, a distressed property can be a great way to purchase an investment with immediate equity whether your intention is flipping the home or holding it as a rental. But if you are purchasing a home for your primary residence, the budget for improving a distressed property can be overwhelming.

This weekly sponsored column is written by Chad Taylor of the Taylor-Made Team and Keller Williams Realty Key Partners, LLC. The Taylor-Made Team consistently performs in the top 3 percent of Realtors in the Heartland MLS. Please submit follow-up questions in the comments section or via email. You can find out more about the Taylor-Made Team on its website. And always feel free to call at 913-825-7540.