Standard, Foreclosure And Short Sale Transactions
Written by Andrew Goodman
Question: What is a standard sale, foreclosure, and short sale? Do you recommend staying away from any of them?
Due to the current market and the increase in property values in our area, short sales and foreclosures are rare compared to the past couple of years.
If prices continue to rise, I hope that homeowners will be able to refinance their home so their monthly obligation is more affordable. When it comes to selling, I hope homeowners can offload homes without having to short sale it or have the lien holders foreclose.
A standard sale is simply that. You have a buyer and a true seller that agree to terms of a contract. All terms in the contract are accepted and agreed upon by both parties. All contingencies have a set time frame, which have to be met and can only be extended with mutual consent. All parties have to fulfill their agreed upon responsibilities under the terms of the contract.
A foreclosure happens when a lender sells a property to recover the balance of a loan from a previous owner who stopped making payments. These properties have typically been vacant for some time and have not been updated. However, some lenders tend to update their foreclosures in hope to minimize any loss on the property.
With a foreclosure, the banking institution is exempt from providing disclosures to the buyer. When trying to ratify a contract with the lender of a foreclosure, the seller typically provides an addendum, which supersedes the original contract or jurisdictional documentation.
This is done to eliminate differences in jurisdiction standard contracts.
More important, it removes all seller responsibility normal in a standard transaction. The buyer should conduct his or her own inspections to find out the true condition of the property.
A short sale is a transaction in which the seller owes more on the property to lien holders than a buyer purchases it for — and doesn’t have the funds to cover the difference.
It’s basically the same as a standard transaction, with the addition of a third party approval contingency. The seller’s current lien holders must approve the contract and loss on the property. The third party approval contingency is a huge risk to the buyer because all terms of the ratified contract may not be approved by the current lien holders.
The seller could have more then one lien holder on the property, which as you can guess, complicates the transaction. You need approval from all lien holders.
The lien holder(s) don’t just have to approve loss on the property, they also have to approve the seller’s ability to sell the property as a short sale. The seller must prove, via financial documentation, that he or she can no longer afford the property. Also, the seller may choose not to sell the home as a short sale if the lien holder(s) require a repayment can’t come to an agreement.
I don’t recommend purchasing a short sale if you have a time constraint in regards to a move date.
A short sale typically is a long, drawn-out process that leads to a lot of frustration. Even though you have a contingency time frame, this contingency period is rarely met. If there is more than one lien holder on the property, you could be looking at more obstacles. I’ve been involved in short sale transactions that have taken 60 days to settle and others that have taken over a year.
I highly recommend you work with short sales that are professionally negotiated. Remember, even if you have a ratified contract on a short sale, it doesn’t mean the lien holders will agree to that contract.
Don’t make any moving plans or spend any money on inspections and appraisals until the short sale has been approved and the third party approval has been removed from the contract. Please make sure your home inspections, appraisal and contingencies are based on the third party approval date, not the contract ratification date.
Obviously you can’t help which property you fall in love with, but standard sales and foreclosure sales are typically a lot easier to work with than a short sale due to the many unknowns that come along.