Foreclosures and short sales can be good real estate investments for the right kind of buyer. Learn how the process works for both buyers and sellers.
If you can wait for a foreclosure, you could save tens of thousands of dollars more than if you buy a short sale. Unless they’re preapproved by the lender, short sales can take months to be approved. If you’re the only bidder on a short sale, or if the lender is taking a long time to approve a short sale, you may be better off waiting for a foreclosure. In a foreclosure, the bank has seized the property and is making the sale itself. It may be willing to take a lower price in order to get the property off its books.
The most obvious advantage of buying a foreclosed house is that the price is usually below market value. On top of that, the closing tends to be relatively quick. Although many foreclosures need repairs, if you rehabilitate a property, you may be able to sell it at a profit. The downsides: You often don’t get to see the inside of the home before you buy, and it could need a lot more work than you expected. The market for foreclosures is also very competitive, and foreclosure auctions usually require you to pay cash.
A real estate-owned (REO) property is a foreclosed home that failed to sell at auction and is owned by the lender. You can search for REO listings on your own, but a better option is to hire a buyer’s agent who specializes in REO properties. A buyer’s agent represents you but is usually paid by the seller. Once you’ve found a property you like, consider all the costs and get an appraisal to see what it’s worth. You may be able to negotiate hard with the bank, which should be eager to get the property off its books, especially after the home has been on the market for 30 days.
A deed in lieu of foreclosure, sometimes referred to as simply a "deed in lieu," transfers a home's title from the owner to the bank that holds the mortgage. The action is taken by the borrower in lieu or instead of having the lender foreclose on the property. It can free the owner from financial liability in a way that can be a bit less damaging than a foreclosure.
Real estate owned (REO) property is a foreclosed home owned by the lender because it failed to sell at auction after the borrower defaulted on their mortgage. REO homes are often considered the best kind of distressed property to buy because the seller is already out of the picture, and some REOs can be purchased directly from the lender.
A short sale package is the set of documents that a seller uses to demonstrate their financial hardship to their lender in order to get approval for the short sale. The documents usually include the listing agreement, signed purchase contract, seller’s hardship letter, an authorization letter, bank statements, and tax returns.
A mortgage forbearance agreement is a contract between a mortgage lender and a delinquent borrower wherein the lender agrees to reduce or suspend the borrower’s monthly payments, and the borrower agrees to a plan that eventually gets them caught up on their monthly payments.
An arm's-length transaction is one in which there is a written promise to a lender that the parties involved in a sales transaction don't know each other. Lenders often require an arm's length affidavit during a short sale because they are taking a loss on the sale and want to make sure the seller and buyer aren’t colluding.
A short sale negotiator, or processor, is someone who negotiates with a lender on a seller's behalf to secure approval for a real estate sale where the sale proceeds would fall short of the mortgage balance. Some may also be able to negotiate debt reduction or forgiveness by the lender for the seller.
A loan modification is a change to your home loan by your current lender, whether that’s changing the length of repayment, interest rate, or other terms. A loan modification can make your payments more affordable, but you must show financial hardship to qualify.
A notice of default is the first step in a bank’s or mortgage lender's foreclosure process. In some states, the notice of default is also attached to the home’s front window or door. It states that the borrower is behind on mortgage payments and the bank is in the process of rectifying the situation. If the mortgage is not paid up to date, the lender will seize the home.
Refinancing a mortgage involves replacing an existing loan with a new one, either from the same lender or a different one. Homeowners typically refinance a mortgage to secure more favorable interest rates or other loan features that can save them money. However, you do have to play closing costs on a refinance.
An "upside-down" or "underwater" mortgage is one in which the remaining principal balance exceeds the property's fair market value. That might happen for several reasons, but it's often tied to plunges in the economy.
A short sale approval letter is a letter that a lender issues to the seller to let them know that it approves a short sale—a sale for less than the amount the borrower owes on a mortgage. It is sent by the lender at the end of a short sale to demand the "short" loan payoff in return for releasing the lien on the property.