Short Sale vs. Foreclosure Process

The choice might be to buy a home during a short sale, while in foreclosure or once the bank owns the home as an REO; each of these has its pros and cons in the home buying process.

Q: I live in a house on our two hundred acre farm. The property next to us is on about ten acres with a small 1,500 square foot house. The property owners failed to pay their power bill and moved away. Now, the home is scheduled to be foreclosed on soon.

I would be interested in expanding my farm by purchasing this property. We would pay cash. I have read that the three options are to try to buy as a short sale prior to the court house steps, try to buy on the court house steps, or buy from the bank after the court house steps.

Any input on the alternatives and overall process would be greatly appreciated.

A: You are correct that you could try to buy the home from the current seller and see if he or she can work with the lender to have the sale approved as a short sale. However, for a short sale, you have to have a willing seller to work with before you can get the lender to agree to the sale.

In a short sale, the owner of the property might list the property for sale with a real estate agent. You see the listing, call the agent and make an offer on the property just as you would with any other real estate you might intend on buying. However, the seller can’t close on that sale because the seller is short the funds to close. The only way the seller can close is for the seller’s lender to agree to accept less than what the lender is owed on the loan; hence the term short sale.

You can bid at the foreclosure auction what you think the property is worth. However, auction or foreclosure sales are for more sophisticated real estate buyers. You would want to know what you are getting at auction. You might bid one price for the home only to find out that there are other issues with the title to the property that may cause you a headache down the line. Also, the process is easier in some states and harder in others. In some states, you might have to have some or all of the cash for the purchase ready on the day of the sale or within a couple of days after the sale.

Once the lender has foreclosed on and owns the property, the lender may list the property for sale with a real estate agent and you can try to buy the property in the same way you might bid on a property for sale that is not owned by a lender. When properties are owned by lenders, they are sometimes referred to as REOs (real estate owned).

While you may find dealing with a lender frustrating and the negotiation process can take a while, you can end up owning the property and can try to negotiate the contract to protect your interests and make sure you are getting good and clean title to the property. Frequently on REO properties, the seller will want to close soon after the contract is signed.

For most buyers, the first and the third option are the preferred alternatives when dealing with distressed properties. However, if you have a team of professionals to work with (a good real estate agent, real estate attorney, insurance agent and settlement agent) you might be able to work the auction or sheriff sale to your benefit and buy the property during the sale process.

But make sure you understand the process and work with people that have in depth knowledge of the process in your state and in the location in which the sale will occur.


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One Response to Short Sale vs. Foreclosure Process

  1. Jeff Becker says:

    Dear Ilyce,

    I might have a “new” one for you. I need your advice:

    The home we sold in the Fl. Keys back in 2006 has gone into foreclosure for some time now. Since we sold this home, we retired and purchased a home in Cape Coral, Fl..epicenter of the foreclosure market.
    My wife and I would like to buy our Key Largo home back at .50 cents on the dollar.
    So far…so good.
    We also own outright 2 other residential properties; a vacation home in N.C. and a condo in Miami. These properties are rented with yearly leases.
    Problem is: We are House Rich and cash poor. We don’t mind this, but we don’t have the cash to repurchase our Key Largo home and we BOTH live on social security and small pensions now. (I would KEEP the home we live in now and rent it for add’l income.)
    Is there a creative way for us to get financing or any other way you can think of?
    Our credit scores average around 700.

    Many thanks,

    Jeff and Lisette

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