The Difference Between a Foreclosure and a Short Sale10/7/2014
Since the economic downturn that began with the housing bust in 2008, the terms short sale and foreclosure have caused some confusion with homeowners who fall behind in mortgage payments. Both terms refer to what is referred to as “distressed properties.” Fortunately, the occurrence of distressed properties has fallen since its height on February 2009, when they represented nearly 50 percent of the entire U.S. real estate market. As of June 2014, distressed sales accounted for only 11 percent of the national real estate transactions. Still, 8 percent of those were foreclosed properties; 3 percent represented short sales.
A foreclosure occurs when a bank or lender forces the sale of a home or other property to recover the balance of the mortgage or loan. Typically, the property owner stops making payments on the loan in addition to leaving the property. After the appropriate legal notices, the bank takes possession, orders an appraisal and puts the property on the market at a price that will ensure the quick liquidation of the asset. Because the bank sees the home as just a line item on their balance sheet, the process can be very straightforward, quick and professional. Frequently, the bank negotiator or asset manager has not seen the property and in fact may be located across the country. With no emotions involved, the process can happen in 30 to 45 days.
A short sale occurs when the property owner sells the house at a price that will not repay the entire balance owed on the mortgage. The lender must first approve the property for a short sale and require appropriate documentation supporting the reasoning behind the short sale. Generally, the owner still resides in the home during the sales process, thus a potential buyer’s offer must be negotiated with the owner first, then sent to the bank for approval. While this adds another party to the transaction, as opposed to a foreclosure in which the bank is the sole party, ultimately the bank has final authority to approve the short sale. All agreements and terms remain pending until the bank signs off on the transaction. Frequently, short sales may take from 90 to 365 days to finalize.
Whether a property is foreclosed upon or put on market as a short sale may depend on factors such as the potential loss to the bank, the level of activity in the housing market and total inventory of distressed properties; however, each type of transaction will have a negative impact on the owner’s credit report.