It is very common for people to confuse short sales with foreclosures. Each type of property is an option when investing in residential property. However, there are differences between two that can influence which property to invest in.
A short sale occurs when the homeowner is upside down on the mortgage. This means the mortgage is worth more than the value of the house. The homeowner owes more than the house is worth. The homeowner negotiates with the lender to avoid going into foreclosure. For this type of deal, the lender agrees to accept less than what it owed on the mortgage. Essentially, the lender is agreeing to sell the home for a loss.
A short sale takes more time than buying a foreclosure because the terms of the agreement are subject to the approval of the lender. Even if you and the seller agree to the terms, the lender might not. It could take more time to renegotiate the terms to meet the lender’s approval. If short sale is one of your options when investing in residential property, make sure to keep looking for other properties as you are waiting for approval. Your contract with the seller should have some flexibility built in. The approval process for this type of deal can be long. You may find another home that is easier to buy during that time.
Foreclosures are another option when investing in residential property. A foreclosed home has already gone through the foreclosure process. The homeowners have received the notice of default from the lender and a notice of sale has gone out. In order to recoup some of their losses, lenders send foreclosures to a trustee’s sale to be auctioned off on the courthouse steps.
Short sales have never entered the foreclosure process. Also, unlike short sales, you cannot inspect a foreclosure before buying it. However, foreclosures are easier to buy than short sales when investing in residential property. Lenders do not have to approve the sale. You must pay cash when buying a foreclosure off the courthouse steps. Foreclosures are sold “as is” and have no money back guarantee. Make sure to have money set aside for repairs in the budget as short sales can also be sold “as is.”
Both short sales and foreclosures can be great bargains when investing in residential property. It is important to do your research to make sure you are paying the right price and to make sure you have a clean title.
