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What is the difference between a "short sale"and a foreclosure?
For a Seller of personal residential real estate-What is a "short sale?"
What is the difference to you as a home owner and you as a buyer? Good question. They both have their place and the terms are not synonymous, though for a buyer they can mean the same thing, in a certain way.If you are a seller, you may want to contact an experienced loan professional like Stephanie at Woodward-O'Connor Mortgage, and see if you can refinance, to save your valuable credit. Keeping your home and your credit should be your goal. Losing your real estate, whether it is a piece of land or a home, or multi-residential property is difficult financially and emotionally. Some sellers and properties may qualify for a "short sale", whereas others will be a foreclosure process used by banks or private lenders to reacquire their collateral or to regain the money that was lent.
A "short sale" is a sale that requires the lender that has the loan for the "seller" to accept some amount "short" of what is owed. Thus the term "short sale" is a transaction where a lender (bank) is effectively the "seller" and the "seller" is not really the seller, but more on the role reversal in a moment.
For example if a borrower, who purchased a home in Santa Cruz for $770,000 and had a loan amount of $700,000, needed to sell, this is what would happen if values had fallen. If the house's value had fallen to $675,000 for instance, several things would need to occur before a sale could take place.
- In order for the home to be sold, the loan needs to be paid before the bank will release the lien on the deed. No bank will put a new loan on the home with that lien on the property So someone needs to pay the loan of $700,000, for which the seller willingly accepted, to buy their home.
- The seller needs to pay the above items in order to close or "sell," or someone needs to pay those costs.
- If the seller has no resources and cannot afford to make the payments on the loan, they will need to submit documentation to the bank evidencing their financial hardship situation. These documents will need to be approved by the bank before they will even consider a short sale. This process can take months, start soon!
- The closing costs, title and escrow fees, and the real estate broker needs to be paid as well as any taxes and related costs. The bank, if the seller qualifies for a short sale, will indicate that they will accept an amount of less than $700,000 and become the ones who accept a buyers’ offer. This is where they accept an amount "short" of the $700,000, which is the face value of the loan.
If the lender agrees to sell, then we start marketing your home for sale after it has been determined what the likely value is. The listing will be put on the market and the bank is informed of the activity. The price is lowered until there is an accepted offer. The bank then determines what terms and conditions it is willing to accept, and then they sign, or inform the seller to sign the offer. Once both parties (bank and buyer) are in agreement, the transaction is more or less like a normal one. At closing the bank puts in a reduced payoff demand to escrow, the buyer brings in their required funds, have their loan approved by a different bank, and escrow closes. The "seller" fills out their disclosure information but the bank is selling "as is" as they have never lived in the home. They buyer has a better picture because of this disclosure information from the seller, who usually lives in the house.
As of 2010 my experience is that short sales are taking 2-6 months for approvals. The banks are slowly getting better, some are good others, really slow and disorganized. Having an experienced person helps a lot, but most experienced agents or short sale negotiators will have the clients started on the process before the home is on the market. For a buyer they can be a great deal, but they are not for buyers who actually want to live in it by a certain time. It is a very uncertain timeline for approval. Once the "short sale banks" approve the offer, then usually there is a 30 day period to have your loan approved. You should have no problem as you should have all of your things inspected before that time,in my opinion.
The Benefits to a bank by doing a "short sale."
The benefit to a bank you may wonder of a "short sale" is one of time and money. If the "seller" does not qualify for the short sale, they and the bank have a few choices.
- They can, should the bank accept it, do a "deed in lieu of foreclosure" and give the house back to the bank. The bank then would own the house and have possession of their collateral for the loan, the house. Sometimes there are concerns of title and liens and a bank will not do this.
- If the bank does not want to accept the house back, as mentioned, the "seller" can stop paying the mortgage and the bank can do an eviction and a foreclosure. This process will often take up to 6 months time. No fun for anyone.
- In a falling market, prices get lower with time, so the earlier one sells a home as a "short sale" the less of a loss for the bank.
- Often when people are out of sorts with their housing situation, they do not do required maintenance, and sometimes vandalize the home. This means the home will likely decrease in value and possibly functionality.
- In a "short sale" the credit and tax consequences are often better than a foreclosure, but talk with an attorney or the IRS regarding that. There can also be problems on secondary financing,in which a bank can have financial recourse for the "short sale." Usually primary purchase loans are non recourse in California. Other states vary.Check with an attorney or CPA if you are contemplating doing a short sale or bankruptcy.
Foreclosures-buy them if you can-here's why
- The bank owns the home- no one else, just one owner
- No one needs to be finding another place to live in
- No one lives there so they are easier to view
- Banks don't want to own property and are willing sellers
- Banks often are willing to do credits for work
- Banks want pre-approved buyers only- real people with money and good credit- they don't want to make the mistake they just made that got them the house back.
- The banks never lived at the house so there are virtually no disclosures-you can have inspections any time and as many as you want.
- When you close escrow you get clean title and title insurance.
- The decision making is much faster than a short sale and you are only dealing with one lender, not many which can be vexing as in a short sale.
- You can get a terrific value with an agent who knows what he is doing.
- See a foreclosure timeline
See the Santa Cruz County School District map of the school districts in Santa Cruz County that your child may attend. Click on the plus + or minus - buttons to enlarge the map. Before making any decision on buying a home, call the school district to be sure your potential home is in the district you want. As schools face economic problems, some schools may close or the boundaries may have changed. You can contact the Santa Cruz County Office of Education at 831-476-7140 or visit the website of the schools or districts and call the appropriate one.