We are seeing a lot of confusion about the differences in ownership and potential issues with purchasing a home or condo in St. Petersburg Fl or the Gulf beaches. Since short-sales and foreclosures represent about 40% of the properties currently listed for sale in the real estate market, I want to explain the difference between short-sales and foreclosures as opposed to traditional sales, and what those differences mean to a buyer looking for a property.
Short-sales: We’ve all heard the now-popular buzzword and read the headlines. A short-sale may occur when the owner of a property is “upside-down” on their mortgage, meaning they owe more to the bank (or banks) than the property is worth. The owner is likely in some sort of financial hardship and wants the bank to take less for the home than they owe, thus saving them from full foreclosure of the property (short-sales are sometimes referred to as “pre-foreclosure”). In this type of sale the owner listing the property for sale still owns the home.
What does this mean to you as a buyer? It may mean a great deal on a property, but too often it means a lot of problems and a home purchase that may never happen. Less than 50% of short-sales ever close. Contrary to popular belief, just because a short-sale property is listed for sale does not mean the bank has to accept an offer, even at full price. Most short-sale offerings are “unapproved,” meaning the owner and real estate agent have listed the property for sale for less than the owner owes on the property without the bank knowing anything about it. The idea is to get an offer or offers and submit one or many to the bank in hopes they will approve the deal. This can sometimes take 5 months or more. I have personally worked on a short-sale purchase for four months that fell through in the end. Another problem is that many properties have a second-trust . In that case if the two loans are held with two different banks then both banks are involved in the approval process.
Even if a short-sale is “approved” by the bank they can still be problematic. Many short-sale offerings are listed at teaser prices to attract many offers. In this case it’s anyone’s guess as to which offer will get the property. A lot of the lower-priced properties are attracting cash offers from investors, and a cash offer will always beat a financed offer all other things being equal (and often even if the financed offer is significantly better).
There are some people getting good deals with short-sales. Yes, we will show you short-sale properties and write an offer on a short-sale for you if that is what you want. Our job is to do everything in our power to get you the property you want. But we want our clients to be aware they may wait months for bank approval only to have it fall through in the end.
(Update 2/18/10: The short-sale process is getting better, but there’s a long way to go. It appears the banks are getting systems in place to make the process a little less painful. But a short-sale contract can still take two, three or even six months for approval).
Foreclosures: Foreclosures, or bank-owned properties, are 100% owned by the bank, and can often represent a great value. The fact that the foreclosure process is complete negates many of the issues inherent in a short-sale purchase. Here are some positive points to consider when looking at bank-foreclosures:
- Owned 100% by the bank and can often close quickly since the bank is motivated to get the property off their books ASAP.
- Can be a great purchase for investors wanting to “flip,” or buy, renovate, and then sell for a profit.
- The home will be vacant.
Now, that all sounds great. So should you focus your search on bank-foreclosures so that you can get a great deal on a home? Maybe not. It depends on your tolerance to several issues. Here are some negative points to consider:
- There are a limited number of foreclosure properties, so if your needs are specific you are much less likely to find a property that works for you.
- Foreclosure properties are often in poor condition and are in need of renovation.
- Most are sold as-is and the bank will not make any repairs.
- Some will not allow home inspections, and usually the utilities are all turned off.
- Since the bank knows little or nothing about the property they are unable (and not required) to provide disclosure as to the properties history or condition.
- Banks usually require an offer to be written using their own contract forms and will not allow any changes to it.
- Many foreclosures are offered at “teaser” prices to attract multiple offers to purchase, reducing the likelyhood that your offer will be accepted.
- Many foreclosures are purchased by investors with cash, which is always more attractive to a bank than a transaction involving a mortgage.
It’s important to do your research if you want to buy a bank-owned property. A foreclosure purchase could be a great deal but will not be without risks. (If you would like to receive a list of bank-owned properties in our area visit our foreclosure page here).
Traditional sales: The rest of the market consists of seller-owned homes listed for sale. Either the owner owes less on the home than the home is worth or they will make up any losses out of their assets. These listings represent 60% of the market and are the least stressful type of transaction on the purchaser (and the owner too for that matter).
Many people have the misguided perception that to get a great deal on a home they have to buy a short-sale or foreclosure. This simply isn’t true. There are loads of great deals out there listed as normal sales. Yes, there are some sellers pricing their homes unrealistically who are unable to accept the loss of their equity. A mistake we often hear is “oh, that comparable property doesn’t count, it was a foreclosure.” This is incorrect. ! If you are financing the home all three types of properties must go through the exact same appraisal process to determine fair market value. A traditional listing will be compared to short-sales and foreclosures that may have sold in the neighborhood or area to determine that value.
Which type of property you purchase will depend greatly on your goals, financial situation, time frame and stress tolerance. For the majority of our clients, particularly for those who will live in the home and don’t want to wait months and months, our recommendation is to take a look at the bank-owned properties to see if there is anything interesting, and move right on to traditional sales if there isn’t. If you have plenty of time and thick skin there are vast quantities of short-sales out there to look at.
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