Foreclosure vs Short Sale: What is the Difference?
If you have been looking for a home you may already be well aware of the housing shortage, which is making buying a home impossible for a lot of first-time homeowners. Some more optimistic buyers may be thinking that if they wait long enough they can find homes that are sold below market value, but the news isn’t great as the days’ tick by. One by one major market forecasters are giving grim updates on market conditions, and it looks like house prices may stay escalated for a few years. This means if you want a better deal (or just an available property) it might be time to find a foreclosure or short sale home and seriously start thinking about buying a bank-owned property.
Why is the Housing Market In Such Bad Shape?
There are a number of reasons why the housing market is facing the worst shortage it has seen since the 1970s. Unfortunately, the combination of all of these factors is leading to predictions that it may take as much as ten years to recover. That’s bad news to people who need to move or want to get their footing on the property ladder. At this point, buying a house in foreclosure may be the only way to find a home in your price range as prices continue to skyrocket due to the high demand and short supply.
How did the housing market get to this point?
- Complete halt of the construction market during the early stages of the pandemic
- Hesitant investors as the pandemic waned
- Shortage of trade workers and construction workers
- High price of lumber
- Fewer people selling homes
Now is the Time to Find Foreclosure Homes
What this means for a potential buyer is that the housing market is rough right now. Not too many homes are sold below market value. In fact, the year-on-year sale price of homes from April 2020 to April 2021 jumped by about 20%. Therefore, most homebuyers have to expect to spend more to get less compared to a year ago, unless you are a savvy buyer and ready to consider buying a house in foreclosure. To do this you will need to find short-sale or bank-owned property that you are comfortable repairing or fixing up to score a better deal.
How to Find and Buy Foreclosed and Short Sale Homes?
If you are looking to find foreclosure homes you should also consider looking at short-sale homes. Homeowners that are behind on their mortgage payments can choose to go either route. While both will result in the owner losing the home, they change the timeline and the consequences of losing a home. If you are looking at homes that are often sold below market value, a short sale may be a better find than a foreclosure.
This is due to the fact that banks are aware of the impending housing shortage and are not as quick to unload the bank-owned property as they used to be. Therefore, you may not find as deep of a deal on foreclosure as a short sale, but that isn’t to say that you can’t find foreclosure homes at a great price as well. With that in mind, if you are considering buying a home in foreclosure your best bet is to take a closer look at both options.
What is a Short Sale?
A short sale occurs when a homeowner gets behind in their mortgage payments and knows that they are in danger of foreclosure. Instead of allowing the bank to foreclose on their home, they attempt to sell the home for less than it is worth. You will often find short sales that are sold below market value because the owners are desperate. A home may be worth $200,000 for example, but they take an offer of $150,000 to get out of their mortgage loan. The lender usually has to agree to the arrangement, but since short sales involve less work, fees, and legal costs than a foreclosure most will.
The end result for buyers is that they score a great deal that is otherwise non-existent in today’s market. It pays to find short-sale properties, and it’s a great place to start looking for an affordable home. Oftentimes short sales are attempted by responsible homeowners who are doing their best to avoid ruining their credit history, so while there is no guarantee, a short-sale home may be in better condition than a foreclosed home. In either case, you will want to make sure to conduct a home inspection since you will likely be purchasing the property as-is.
What is Involved in Buying a House in Foreclosure?
Of course, short sales are not your only option. Not all lenders will accept a short sale and not all homeowners are interested in the extra work. For this reason, you will find foreclosure homes on the market as well. As the government continues to ease pandemic restrictions banks are expected to restart the foreclosure process. Therefore, it is only reasonable to assume that new foreclosures will be hitting the market over the coming weeks.
Foreclosures usually take place after a homeowner falls behind on their mortgage payments and is unable to bring the loan up-to-date by the date assigned by the lender. At this point, the property becomes a bank-owned property and the bank will attempt to sell the property as quickly as possible to recoup their losses.
The benefit of buying a house in foreclosure is that the sale usually moves much faster than a short sale because the lender wants to move the home as quickly as possible. It is not uncommon to find foreclosure homes on the auction block, but be aware that they should be inspected as well since they are usually sold as-is. Oftentimes homes that are foreclosed upon are abandoned by the owner, so it is reasonable to assume they did not properly take care of the home either. While you can also score a great deal by buying a house in foreclosure, you still need to be aware of the potential repair costs that can offset your final profit.
