Short sales. Foreclosures. Bank Owned. What’s the Difference?

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Bank owned properties, short sales and foreclosures were common in the Coeur d’Alene real estate market just a few short years ago. Our property values have recovered and soared in recent years but we still see some of these distressed properties pop onto the market from time to time.

Many people think that 

  • short sales
  • foreclosures  
  • bank owned 

are all the same thing. In fact, they are completely different.

 

SHORT SALES

The term short sale comes from the fact that the mortgage company will be shorted on the amount they are owed. They will agree to settle for less when the true market value of the property is less than what is owed. When so many homeowners were upside down on their mortgages, this was common. Since property values have returned, we aren’t seeing many of these now. However, they do appear from time to time and I just closed on one a couple of months ago.

When a seller receives an offer they can accept or reject it. If accepted they will present it to the mortgage lender for review. The lender will require a pre-approval letter to accompany the offer, along with proof of funds necessary to close the deal. There will be certain disclosures to sign, one being where the buyer, seller and agents all acknowledge it’s an arm’s length deal and there are no side agreements between any of them. The lender will not accept an offer with a contingency on the sale of the buyer’s home.

Other than the additional paperwork involved and the time it will take for the mortgage lender to review and verify the information, the buying process for a short sale is the same as for a typical resale. The owner is still the seller, but the lender has final approval. 

FORECLOSURE

Foreclosures are properties seized by lenders for non-payment. Idaho is a non-judicial foreclosure state and the process takes about 4 months from when the lender issues a notice of default. 

The process for buying a foreclosure is completely different from the typical home buying process. First, there’s often an auction. You must have a certain amount of certified funds to participate at that auction. Additionally, you will be bidding on the property as-is and often without any opportunity to view or inspect it. There may even be people still living in the home, and you would be responsible for evicting them. You would also be responsible for any outstanding liens on the property.

Given all of this, you would not be able to use a typical conforming mortgage to purchase the foreclosure. 

 
BANK OWNED (REO)

When property doesn’t sell at auction, the lender takes possession of the property. They will evict the occupants, pay off the leins and prepare the home for sale. Once all issues have been resolved it will go on the market as a bank owned home. 

These homes are usually sold as-is, however you will be able to conduct inspections just as you would in a typical home purchase. There will be no information available to you about the condition of the home since the lender has never occupied it. There will be some bank disclosures to sign, and as with a short sale, the lender will not accept an offer that is contingent on the sale of the buyer’s current home.

As long as you understand the special circumstances and risks, shortsales, foreclosures and bank owned properties can be good options to pursue. There are pros and cons to each of them, and having all of the relevant information will allow you to make an educated decision as a home buyer, and greatly increase your chances of success.