What Is the Difference Between a Short Sale and a Foreclosure?

The difference between a foreclosure and a short sale is one of ownership.  In a short sale, the seller still owns the home.  Because he is underwater on his mortgage, meaning he owes more on the home than the home is worth, he is asking his mortgagor, the bank, to accept less than the full amount he owes as payment.  In order to qualify for a short sale, the owner must be able to demonstrate financial hardship and must show that he is unable to make his present mortgage payment.  Usually, but not always, the seller is already behind on his payments and is in some state of pre-foreclosure.

In a foreclosure, the bank has already foreclosed on the home, and is now the owner.  The home is  maintained by an asset manager for the bank while it is listed for sale.  Foreclosed homes are called REOs,  meaning real-estate-owned.

Why would a buyer consider purchasing a short sale or foreclosure?  Simply put – money.  It is possible to get a great deal on an REO or short sale.  A buyer with some risk tolerance and a lot of patience,  can walk out of closing with instant equity in his new home.

What should a buyer look out for when purchasing an REO or short sale?  One thing to be aware of is that most REO and short sale properties are sold “as is”.  Short sale sellers are already in a distressed financial situation and rarely have money for repairs.  Banks are not in the “fix-up” business; they want a quick, as is sale.

The best defense a buyer has is to get a home inspection and a wood destroying organism (termite) inspection.

Next: Differences in purchasing an REO and a Short Sale


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