Foreclosure…Pre-Foreclosure…Short Sale… What’s the Difference?

I would like to help educate you on the current real estate market so that you can easily understand market conditions starting with the terms “Foreclosure”, “Pre-Foreclosure” and “Short Sale”. All of the terms have one thing in common. The mortgage (debt) on the property is at risk to a lender or note holder.

First, Let’s talk about Foreclosures:

A home “in” foreclosure is a home where the seller has not been able to pay the mortgage and it has been scheduled for an actual foreclosure date. These dates are always the first Tuesday of every month. In Florida, it is not a court hearing. In Florida, the bank can actually file notice to foreclose, set a date, and the home is sold on the courthouse steps on that date. In most cases, the bank that you have your loan with will send a representative to actually purchase back the home. No matter what you hear on television, homes are not being sold for pennies on the dollar to whoever shows up with the money. These homes are now “foreclosed” properties and OWNED by the bank. The bank will turn these properties (sometimes called REO properties) over to a Realtor who will list the home for sale, and enter that listing in the multiple listing service (MLS). This service makes the home available to hundreds and thousands of agents, and thus to people searching to buy a home. If you have an agent representing you in your home search, your agent would prepare a normal purchase and sale offer and present it to the agent who listed the property, who in turn will present the offer to purchase to the bank that owns the property. The entire transaction is handled exactly like a “normal” purchase and sale would be, with the exception of a few requirements the bank may have to accept offers.

There are rumors that you can purchase these homes for pennies on the dollar. However, once the bank has taken back possession of the property they are even less likely to consider ‘low-ball’ offers to purchase. Why? Because they not only have the balance of the loan on the property, they have also spent thousands of dollars to hire attorneys and assumed all the costs of the legal proceeding to have the home foreclosed, and re-purchased. If you would like to purchase a home listed and owned by a bank, the best advice is to offer as close to the asking price as possible, assuring a more receptive response to your offer, and more serious consideration.

Now, let’s talk about Pre-Foreclosures:

You are searching the internet and you find a listing that says “pre-foreclosure”. What does this mean? It means that the home is still actually owned and may be occupied by someone who is in danger of foreclosure because they cannot pay their mortgage. The home has not yet been sold back to the bank at a foreclosure sale.

Offers to purchase will be presented by the agent representing you to the actual Listing Agent, who will present the offer to the actual seller/owner of the property. The bank is not involved in this negotiation. These properties could be the most likely candidates for the “good deal” because the sellers are desperate not to have a foreclosure on their credit. Assuming that there is enough equity to pay for the sale and pay off their mortgage note, they will most likely accept thousands less than in a normal market to avoid the loss of their home altogether.

In some cases however, sellers do not have enough equity to cover the expenses of selling and pay off the note. It could be that in their neighborhood prices have dropped, or they haven’t owned the home long enough to build up equity. What can a seller do when they owe more on the home than it can be sold for? The answer is a Short Sale.

Which is our last topic Short Sale Listings:

A short sale is one in which the bank having knowledge of the seller’s distress and the current market conditions of this particular property, will actually accept a lesser payoff so that the home can be sold and they can avoid the costly foreclosure process. It is an offer to purchase a home, BEFORE it is scheduled for foreclosure, for much LESS than the actual mortgage balance on the home. How does this work?

Imagine you are the bank. You already have thousands of homes and you do not want to foreclose on any more homes. The home in question is in a very slow market, or the value has dropped for whatever reason. The homeowner has not paid the mortgage note for several months. You now have to spend money to hire an attorney to proceed to legally foreclose on the property. Then you will have yet another home to put back on the market. You already know that the value has decreased. You already know that the market is slow. You realize it may take months to sell the home, and that it will have to be sold for far less than what you have spent on the home considering the mortgage balance, and the expenses of the foreclosure. In addition, you now have to pay an agency to market and sell the home, costing you even more money. To accept an offer to purchase this home, for even thousands below the mortgage balance owed, is a smart and acceptable deal for the bank. In doing so, they avoid the extra costs involved in the foreclosure process. These can also be attractive deals to the buyers looking for a “good deal”. However, we must warn you that this is a long and bumpy road that requires patience and flexibility. This is not the opportunity for the home buyer who needs to locate and close on a home in 30-45 days. In some cases, the deal can fall apart mid-stream and you would have to walk away and begin your search all over again. If you are determined, patient and flexible this could be worth the effort and the wait.

On a final note, don’t believe everything you hear. There are no “secret” listings that are only available to real estate agents, or those who are willing to pay for information on the internet. If there’s a property owned by a bank in our area it is LISTED and available for sale to any agent with a buyer.

Bottom Line…what is the BEST way to get a great deal?

You Should Be Pre-Approved. Before you begin your home search, find a lender and get a valid pre-approval letter. This is one step beyond being pre-qualified. This not only helps you decide the correct price range for your search, it assists your ability to have your offer seriously considered by a seller. An offer with a letter of pre-approval could very well be accepted over a higher offer which does not. A good lender or mortgage broker worth his salt will know what constitutes a VALID Pre-Approval. I recommend my company for this service as the owner of People's First Financial Services. call JoAnn Papsidero at 321-243-4917 or email me JoAnn@myFLdreamhome.com