Monday, February 1, 2010

Foreclose does not mean short sale

A frequently asked question at open houses is "Is this a short sale?" Given the current market that's a reasonable question. On occasion, I'll get someone who asks if the home is a foreclosure/short sale as if they're the same thing. That usually prompts an explanation of the difference.

A Realtor should know the difference. A foreclosure usually happens when someone falls behind on their payments. I say usually because I've heard rumors of banks foreclosing on homes when they are faced with liquidation. Regardless, a person behind on their mortgage may or may not have equity. If they have equity, it's NOT a short sale.

Short sales are when the homeowner wants or needs to sell and the current value of the home is below what they owe on the mortgage(s). When that happens, the bank has to approve how much "short" the seller is - meaning what the difference is between the bank loan and the amount the home is hold for.

A home in foreclosure, with plenty of equity, will sell just just like any other home with the seller taking any equity in the home after paying off the loans. If the home is bank owned (aka REO), meaning the foreclosure process has been completed, it should sell just like other homes as well. With a REO property, equity doesn't matter since the home is owned by the bank.

However, a short sale can be a long process taking many months while people at the bank decide if the offer made on the home is acceptable. If not, a new offer or counter is submitted and the process restarts. While most short sales only take a few months, some take over a year. Patience is the key.

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