One of the most common questions asked of me is if a buyer can get a better deal by buying a foreclosure rather than a short sale or regular sale. The immediate response to my buyer is if they know what the difference between all three of them are? …usually they don’t – which is completely ok. People hear things repeatedly in the media and it’s hard to sift through what’s true and not true. I’m going to clarify the difference for you once and for all so you know the EXACT difference between all three.
The two primary differences between all three types of sales are the length of time it takes for your offer to get accepted and the amount of information you will be given by the seller. We’ll go over the price difference later on. First is the regular sale. A regular sale is what most people are familiar with. You have a buyer who makes an offer to a seller or sellers. The sellers usually take up to a week or so to review the offer and let the buyer know if its accepted, rejected or if there’s a counter offer. A foreclosure works in a similar fashion. It can take about a week to find out if your offer is accepted. The difference is that you aren’t dealing with a seller you might be used to. You’re instead dealing with an asset manager of the bank who’s an organizer and number cruncher.
The BIG difference between a regular sale and a foreclosure is the information they will provide to you as a buyer. If a few years ago there was a roof leak that the owner patched up, but it was just that – a patch – the regular sellers can disclose this to you so you know you really need to get the roof checked out. Because the foreclosure is a bank owned property and they’ve never stepped foot in the house, they have NO idea what’s going on. In other words, the foreclosure owner will not be able to tell you anything that’s wrong with the place, whereas the regular sellers will. In the state of California, owners are required by law to answer multiple questions about what they might know about a property. However, banks are exempt from these questions. In fact most banks have you sign paperwork from them specifically stating you cannot sue them if you find out something is wrong at a later date!
Now the most interesting one – the short sale. First let me explain what exactly a short sale is. A short sale means that the owner of the property is underwater on their loan. For example…The owner paid $500k for a house and also got a loan for the full $500k, and currently the home is worth $250k. Obviously in 99% of cases the owner isn’t going to come up with the difference…be it because they don’t want to or because they simply don’t have the money to do so. If the owner knows they are no longer able to afford the property they put it up for short sale. It’s called a short sale because the entity getting “short” end of the stick is the bank. With a short sale, the sellers are still responsible on answering all of the questions on the multiple disclosure forms. However, the big difference is the timeframe…which is almost never only 1 week…a short sale can actually take on average 1 to 6 months. Banks have gotten a lot better at approving them in a timely manner, but you’re still seeing time frames of about 1-3 months. Luckily, if a short sale has ALREADY been APPROVED, the timeframe drops down to about 2-3 weeks, which isn’t nearly as long!!
Now the big questions…which one of the three types of sales are the better bargain???…the foreclosure? The short sale? The regular sale?? The answer is…it depends… I know I know I know, that’s not the answer you want to hear, but it’s the truth. It really depends. Let me explain…
First the foreclosure. The way banks price foreclosures is simple. They ask the local agent that’s going to sell the property to do a BPO – or basically a mini appraisal for a small fee. The agent will do so and tell them what the estimated value is. The big question the bank’s always have is, “How low do we have to go to sell this property in under a month?” …And the answer is almost always “subtract 5% of what I suggest its worth!” So here we have a bank that’s going to give about a 5% discount…the reason they don’t mind is because at this price range they EXPECT to have MULTIPLE OFFERS…if there’s multiple offers, what does that do to the price…? Exactly, it pushes it upward! I’ve literally seen people get in a bidding war and over pay a property by SO much, they could’ve bought the next door neighbors house for almost half the price! Does this mean it ALWAYS gets multiple offers and that the price will get pushed higher?? No…but they don’t care. They want to dump this property as quickly as possible.
A regular sale may have the same thinking, but not always. Pricing a property as a seller and agent is absolutely key. Some sellers also just want to get rid of a property and be done with the process. Most want to price it properly and get one to three seriously interested buyers and work with them on getting close to asking. Then there’s a few that like to overprice to test the waters and leave room for negotiation – which almost always results in a property that lingers on the market and never gets sold…or gets sold for much much less than they could’ve gotten in the first place.
Finally, the short sale. The great thing about the short sale pricing is that 99% of the time they don’t care what the property fetches for one simple reason…the seller isn’t going to make a single penny from the sale!!! In almost every scenario of a short sale the seller simply wants OUT of the situation. If you’re selling your property and you know you’re not going to make a single dollar, are you going to try and get the most money for your place or are you going to try and sell it as quickly as possible?? You’re obviously going to price it slightly below market to get an offer as quickly as possible…
Now you understand that just trying to pick out a foreclosure might not be the best bet. You have to look at ALL your options. The only variable here is if you’d be willing to wait a while for a short sale to go through. Until then, next time you have someone tell you that foreclosures always give you the best deal compared to a short sale or regular sale, ask them if they know the difference…just try not to have too much fun with them…now that’s good to know. 🙂
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