What is the difference between a short sale and foreclosure?

Some real estate investors like to examine foreclosed properties with an eye toward finding bargains.  In other cases, a property that’s up for a short sale may seem equally attractive.  But what’s the difference?

A short sale is one in which, when the homeowner cannot pay his mortgage, the lending bank sells the property for less than the total amount due on the original loan; in other words, the seller’s lender accepts less for a property than what is owed on it.  A short sale does not necessarily absolve the borrower from an obligation to pay the outstanding balance remaining to the creditor (the deficiency).

In a foreclosure, a property is repossessed by the lender because the owner has failed to pay the mortgage, or has other unmet financial obligations (unpaid property taxes or HOA fees, contractors’ liens, etc.).

Let me tell you more about short sales and foreclosures.

In a judicial foreclosure, the lender takes the owner to court to outline the extent of the debt and apply to foreclose.  If the court finds in favor of the lender, the homeowner is liable for the total amount owed on the mortgage loan plus any additional costs associated with the foreclosure process (court costs, legal fees, etc.).  In a non-judicial foreclosure, a lender can send a Notice of Default (NOD) directly to a homeowner if he fails to pay three consecutive installments on a mortgage loan; if the owner is still unable to settle the debt, he receives a Notice of Sale from the lender — which is recorded in the county records and published in local newspapers — and the property is auctioned.  (If the home fails to sell at auction, it becomes an REO (real-estated owned) property, and is listed for sale later by a realtor on behalf of the bank.)

A short sale takes place while the owner is still in possession of a property; he can have a role in the sale.  In a foreclosure, because the lender has already repossessed the property, the homeowner has no part in a subsequent sale.

There can be different tax impacts for homeowners.  In a foreclosure, a lender can sue an owner for the difference owed if they foreclose and they don’t sell the property for what’s owed on it.  While this is also possible with a short sale, the owner can request a sale with “no recourse,” in which the lender agrees to recoup the balanced owed.

Both foreclosures and short sales often look like good opportunities for the savvy investor searching for bargain properties.  However, they can often be complicated transactions — with cash flow or tax issues, title problems, undiscovered liens, physical damage revealed upon house inspection, etc. — that can daunting for novice real estate buyers.  As a specialist in short sales and foreclosed real estate, I’ll put my years of experience with these and other challenging property sales to work for you to help you get the most out of your investment.  What do you need?  Contact me today to discuss your unique requirements.

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