The difference between short sales and foreclosures when investing in residential property
It is very common for people to confuse short sales with foreclosures. Each type of property is an option when investing in a residential property. However, there are differences between the two that can influence which property to invest in.
A short sale occurs when the homeowner is upside down on the mortgage. This means that the mortgage is worth more than the value of the house. The owner owes more than the house is worth. The owner negotiates with the lender to avoid foreclosure. For this type of deal, the lender agrees to accept less than what he owes on the mortgage. Essentially, the lender agrees to sell the house for a loss.
A short sale takes longer than buying a foreclosure because the terms of the agreement are subject to lender approval. Even if you and the seller agree to the terms, the lender may not. It may take longer to renegotiate the terms to meet the lender’s approval. If a short sale is one of your options when investing in residential property, be sure to keep looking at other properties while you wait for approval. Your contract with the seller should have some flexibility built into it. The approval process for this type of deal can be lengthy. 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 been through the foreclosure process. The owners have received the notice of default from the lender and a notice of sale has been issued. 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 you buy 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 you buy a foreclosure on the courthouse steps. Foreclosures are sold “as is” and have no money back guarantee. Make sure you 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’s important to do your research to make sure you’re paying the right price and have a clean title.