When you’re hunting for a property, you may come across a couple of terms that will be unfamiliar to you – the “short sale” and “foreclosure”. What’s the difference, you may ask.
Each term refers to a property that’s for sale, but the process of completing a deal is very different.
If you find a suitable home that’s subject to either a “short sale” or “foreclosure”, you could end up with a bargain, but there’s no guarantee. You should be aware of the meaning of both terms so that you can make a fully-informed buying decision.
A “short sale” occurs where the home is offered for less than the value of the mortgage held on it.
This should be a red flag for any prospective buyer, and it’s a nightmare for the owner. It means they bought the home for more than it is currently valued. As a buyer, you’ll want to know how and why this occurred. There may be several explanations, the most common being that it was bought in a boom that went bust.
Sometimes, infrastructure like a new road or rail line, or an economic venture such as a mine, may undermine its value. You don’t want to purchase a property that’s going to drop further in value or be hard to sell when the time comes to move again. So, you should be on guard for any “short sale” situation and dig deep to find out why the property is being sold this way. Additionally, a “short sale” requires a lot of paperwork and can take up to a year to complete.
A “foreclosure” is executed quickly by comparison and occurs when the owner can no longer meet their financial commitments. In that situation, the bank takes possession.
Sometimes, these properties can offer good buying because many lenders want to retrieve the book value of their loan rather than get the market price for the property.
These types of sales remind us how quickly life can change. The death of the family breadwinner has economic consequences beyond its personal tragedy, and the loss of employment has similar financial repercussions.
A “short sale” occurs where the homeowner is proactive about their financial situation. When the home sells, they pay the difference between the price achieved and the value of the outstanding loan.
A “foreclosure” is forced upon the owner, who has often abandoned the property. This scenario will hurt their credit rating. However, the owner who opted for a “short sale” will not be affected in this way if they make good on the outstanding amount of the loan.