As the southern California Real Estate market continues to correct and transitions more into a buyers market. Home buying options are becoming available that were not previously available. Chief among these new options are the Short sale and the Foreclosure, which are often confused for one another but are very different animals.
As Southern California's real estate market has transitioned to a buyer's paradise, short sales and foreclosures are popping up. A short sale is a transaction in which the mortgages on a house add up to more than the current market price of a home. When a seller must sell and has no equity in their home, the bank is asked to accept less than a full payoff of the mortgage. The existing lender will request from the owner what is called a short sale package to determine first if there is a financial hardship that would qualify the seller to do a short sale. The package must include an application, pay stubs, W-2’s, tax returns, and a statement of all assets. The real estate agent will be asked to prepare a market evaluation to determine if contracted price is a fair market value. The bank will also determine if cash had been taken out of the property for a refinance. At this point the bank will have to make a decision to grant the short sale at an acceptable price or face the risk of taking back the house in a foreclosure. Initially the banks were not approving many requests for short sales, but it appears that percentage is short sale’s is much greater now than market has become more challenging for the banks.
The process starts with a seller who has no equity placing their home on the market, usually with a real estate agent. A contract to buy the home is agreed to by the seller, subject to the bank accepting less than the full payoff amount. As opposed to a foreclosure in which the bank owns a home in the contract is between you and the bank. When you make an offer on a short sale that has been accepted by the seller, it may take up to 60 days for the bank to respond to the offer. There is no guarantee that they will accept the short sale or agree to your price. Even if the bank agrees to accept a short payoff on their loan, further negotiations may occur. The bottom line is, if you're offering on properties that are short sales you could be risking valuable time negotiating on a home that you won't be able to buy. Generally a short sell property is in better condition than a bank owned home would be, since usually it is lived in and being maintained. This can be a big plus for a short sale, especially if you will be cash poor after the closing on your new home.
During the home purchase process a seller is required by law to disclose anything which negatively affects the value or desirability of the home and deliver a TDS, which stands for Transfer Disclosure Statement and is a very important document. When you purchase a bank owned property or foreclosure by law the bank is exempt from this disclosure requirement. Without this information you must be careful to do all of your home inspections and thoroughly investigate the property for any defects which may affect its desirability or value. If you are buying a bank owned property carefully evaluate the condition of the home and the amount of money you have available to bring it up to the standards you want your family to live in.
So really whether it's better to buy a short sale or foreclosure comes down to several factors. Are you willing to spend time negotiating for a home that you may not be able to buy? Will you be able to investigate a property thoroughly enough to compensate for the lack of disclosures from a seller? And finally, we have enough money on hand to fix the home if it is in very poor condition? These are decisions that will have to be made by each individual home buyer there, are no right or wrong answers, only risks and benefits to be assessed.
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