Distressed Differences (reader request)


I’ve had several inquiries from readers asking what the difference between a traditional resale, short sale and foreclosure was.  There are only a few minor differences between them, but these differences could drastically alter the scenario, whether you’re a home buyer or seller.

A traditional resale is a property which is being sold by the homeowner.  In many cases, the homeowner may have a mortgage balance on the home that needs to be satisfied at closing.  The selling price should address mortgage balance and related closing costs; otherwise the seller would have to bring the difference to closing.  The majority of real estate transactions are of this type as it provides a certain level of protection for both the buyer and seller as there are contingencies that need to be met for the contract to proceed to closing.  That trend has been challenged recently with the rise in distressed sales.

A short sale transaction is where the home sale proceeds will not cover the balance of the mortgage (e.g., a contract price of $100,000 when the mortgage balance on the home is $125,000).  In these types of transactions both the homeowner and the lender (and second lender if any) would need to approve terms, and a real estate contract is not created until all parties have agreed upon such terms.  There may be additional provisions and contingencies required throughout the short sale as well.  Time constraints, and time needed to gain lender approval are one of the biggest obstacles in the short sale process.

If the homeowner falls far behind their mortgage payments, the lender may initiate foreclosure action (although foreclosure process can start at anytime a borrower becomes delinquent).  Foreclosure by judicial sale involves the sale of the property under supervision of the courts.  There are other types of foreclosures that can occur, and homeowners may want to consult with their broker and/or attorney for more information regarding their specific situation.  These types of sales may have less protection for potential buyers, thus many purchasers at this stage are seasoned veterans capable of estimating repair costs and performing title searches.

If the property is unable to attract an offer during the foreclosure sale, the property may be repossessed by the lender and now is classified as “real estate owned” or REO.  The lender is now the owner and seller of the property.  Many people sometimes refer to these generally as “foreclosed properties” although there is a need to differentiate between purchasing a home during the foreclosure auction and purchasing when it is REO.  During REO purchases, buyers and sellers are generally afforded similar protections and contingencies used in traditional resales such as attorney review, mortgage contingency, and inspection and can close relative to a normal resale purchase.  Home repairs, inspections items and related items (such as a survey) may not be addressed by seller and are negotiated in each transaction.  You will want to consult with your broker during your purchase.  Many buyers have favored the 203k loan to address repairs and construction costs for homes that have been vacant for a long period time and have fallen into disrepair.  ?

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Sherwin L. Sucaldito, REALTOR®, GREEN, ABR, CRPM
@properties
The Institute of Luxury Home Marketing
Green REsource Council, GREEN
Accredited Buyer’s Representative , ABR
Certified Residential Property Manager, CRPM

Creative Commons LicenseDistressed Differences” by Sherwin Sucaldito is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.