Saturday, December 06, 2008

The Difference Between Foreclosures and Short Sales

We get this question all the time - what is the difference between a foreclosure and a short sale? And which is the better deal?

A foreclosure or REO (which stands for Real Estate Owned) is a property that the bank has already taken back through the foreclosure process. The owner has moved out and the bank holds legal title to the property. In some states the previous owner still has a “redemption period” to get the home back from the bank. But Las Vegas foreclosures are final and the bank can turn around and sell them right away. An offer on a foreclosure property can take anywhere from one day to two weeks to be accepted by the bank and usually 30 to 45 days from acceptance to close.

A short sale or pre-foreclosure, on the other hand, is where the owner owes more money on the property than it is worth and is trying to sell it for less than the amount owed. An offer to purchase may be approved by the owner (who is not going to walk out with any cash anyway), but the contract is still subject to final approval by the bank (or banks if there is more than one mortgage on the property). The bank has to agree to take less than what they are owed. Once a bona fide offer is received, the seller is required to write a hardship letter stating why they should be eligible to do a short sale. They must also provide bank statements, paycheck stubs, and a financial statement to show that they cannot make the payments. In addition, the seller’s Las Vegas real estate agent must provide a market analysis of the most recent comparable sales to justify the selling price. The bank will also send out their own appraiser some time during the process to get an independent analysis done.

Just the approval on a short sale can take anywhere from 60 to 120 days, and sometimes even longer. Until the bank approves the sale, the buyer is in limbo, not knowing whether they will actually be able to buy the home. There is, unfortunately, no way to speed up the process. The banks won’t even talk to the real estate agents or sellers in the meantime to let them know what the status of the approval is. Often the property goes to foreclosure sale before an approval can be generated.

In either case, don’t expect to have repairs made or receive a lot in buyer concessions (closing costs paid by the seller). Most short sales and foreclosures are sold “as is, where is.” Banks will only be willing to do the minimum repairs to a property that will allow it to be financed. (Missing flooring, missing stove or A/C, etc.) On a short sale the seller does not have the money to make repairs at all.

In the past six months we have seen many short sales on Las Vegas homes and condos that have been foreclosed upon even though there was a good offer on the table. The kicker is, after the foreclosure is complete the bank often turns around and lists the property for LESS than the offer that was tendered!

Though this doesn’t seem to make any sense, there is actually a good rationale behind the bank’s actions. If a bank approves a short sale, they cannot write off the loss (the difference between the mortgage owed and the actual sales price). With a drop of more than 30% in the Las Vegas real estate market over the past two years, a home that was worth $300k might now only be worth $200k. If the buyer got in with no money down originally, the bank is facing a principal loss of $100k plus expenses and past due interest payments.

But if the bank forecloses on the property, they can write off 100% of the loss. Now they can afford to sell that $200k home for $170k and still come out ahead of the short sale scenario by taking the $100k+ write off on their taxes.

Generally speaking, we can get our clients better deals on Las Vegas condos and homes by targeting foreclosure listings. Foreclosure buyers need to keep in mind that EVERYONE is looking for those deals right now. Sales volume in Las Vegas in August and July was back up to 2005 levels, and most well priced foreclosures have multiple offers submitted. Most foreclosures are actually selling above the listed price, not below.

Buyers need to keep in mind that these foreclosures are steals to begin with. Then they need to have a savvy agent that can provide comparables to judge a home’s true worth. It’s not how much you can “get off” the sales price that counts - it is how much the winning bid is in relation to the home’s value. Buyers need to be patient and realize it might take anywhere from two to six offers to acquire the home of their dreams at the price they want to pay. But IT CAN BE DONE!

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