Tuesday, June 3, 2008

Bank Owned, Foreclosure, Short Sale - What's the Difference?

Here's a brief breakdown that should simplify some of the language being tossed around the real estate world these days.

Pre-Foreclosure - In Arizona, this term doesn't really have a legal meaning. What it usually means in day-to-day practice is that the home owners are trying to sell because they know they have either stopped (or will soon stop) making the mortgage payment. Often, the home owners also know or suspect that they can't sell for what they owe on the home, and any resulting sale will be a Short Sale.


Short Sale - In this case, the homeowner has usually stopped paying the mortgage. In addition, the home is worth less than what they owe the lender. If they're able to (1) find a buyer and (2) get the lender's blessing on the deal, the lender will accept a portion of the total loan payoff amount. The lender is left short, hence the name. My colleague Chris Butterworth has a great series of blog posts about the Short Sale buying process. Or you can see my 4-part series on short sales here.


Short Sales are sometimes great bargains for buyers, but know that buying a short sale property can take months. The home comes without any disclosures about condition, and is sold As Is. Buyers can inspect the house but Sellers/Lenders won't do any repairs. Sellers/Lenders will almost certainly not contribute to the Buyers' costs. (Update August 2008 - In recent months banks are making exceptions and covering some buyer costs when the buyer is a first time homeowner using an FHA loan program.)


Finally, you have to play a waiting game. Lenders are overwhelmed, they were never set up to operate a real estate brokerage in the first place, and will probably take a month or more to even acknowledge receipt of a Buyer offer. To add insult to injury, if you don't submit a complete package of documents, you'll be waiting even longer while the lender requests docs one at a time.


Foreclosure - In Arizona, this has a legal meaning. Here, we don't sign mortgages; we sign Deeds of Trust. It's the same idea as a Mortgage, just with an extra party inserted into the process. There's a borrower (homeowner), a lender and a Trustee. The Deed of Trust works just like a mortgage except in the cases of foreclosure. Get 3 or more months behind on your mortgage payments and the lender will issue a Notice of Trustee's Sale.  The Notice states that the homeowner has 90 days in which to bring the mortgage payments current or the Trustee will auction the home, often on the court house steps. Trustees are often attorneys and sometimes the auction takes place in their offices. A homeowner facing foreclosure may try to sell the house to pay off their lender. If the sale proceeds won't entirely pay off the mortgage amount, then it's going to become a Short Sale.


REO - Also known as Lender Owned. One way or another, the lender now owns the home. Maybe the homeowner just mailed in their keys and disappeared. Maybe the lender was stoopid and didn't approve a short sale Purchase Contract when presented with one. Maybe the home wasn't bought at auction. In any case, the lender owns it. They've already taken a loss against the original loan balance on the property. REO properties carry all the downsides of Short Sales except that you're more likely to get an answer within days or weeks on REO properties. However, the bank is unlikely to take much below list price. They're already taken a big loss and usually these properties are listed pretty close to the rock bottom of what the bank will accept.


Want More Info? See my friend Chris Butterworth's site for 2 blog posts about the difference between Short Sales and REO properties. Try Steve Belt for advice about why listing your home for sale if you're facing foreclosure is a good idea. Steve works the Desert Ridge and North Scottsdale market. He and I overlap territories a bit so technically I've just recommended my competition to my readers. But we're totally different personalities, so some potential clients will "gel" better with Steve, or with me.  Or see my friend Dru Bloomfield's blog post on Tips for Buying a Short Sale. Dru works the McCormick Ranch area of Scottsdale and can help you out if you need a Realtor who specializes in that part of town.


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