Bank-owned vs Short Sales

It seems like almost every time I meet a new buyer I have to explain how these two types of “distressed sales” are different.  Since distressed sales are probably here in some type of volume for at least the next five years or so, I thought it would be a good idea to lay-out the main differences between the two.

Short Sales are homes that are still owned by the seller, but are either in pre-foreclosure, or are in danger of being in pre-foreclosure.  The seller has some type of hardship that won’t let them make payments on the home, the home is worth less than it can be sold for, and the lender has agreed to take less than is owed on the home.  The advantage to the seller is that a short sale will have much less and sometimes almost no affect on their credit.  It isn’t a “magic bullet” however.  The lender can require the seller to bring cash to the table or require the seller to sign a promissory note.  In some case the lender may pursue a “deficiency judgement” against the seller, although this has been happening less and less lately.  When a buyer wants to make an offer on a short sale, their Realtor submits the offer through the listing agent to the owner, who signs it and then it goes to the lender for approval.  The disadvantage of short sales is that the approval process can take months and during this time the buyer will know very little of how the process is progressing and when or if their closing will take place.  There is very little standardization among banks on processes and it can sometimes seem like the rules change frequently.  Also, lenders will not usually perform any repairs to the property and will deny some of the closing costs usually paid by the seller, putting an extra financial burden on the buyer at closing.  The upside is that buyers can walk into homes and have instant equity, sometimes 10-20% over other homes in the neighborhood.

Bank-owned properties are homes that have been foreclosed on and are owned by the lender.  When these homes come on the market, the buyer’s Realtor negotiates directly through the listing agent with the bank as seller.  Foreclosures used to take a long time, but nowadays buyers can get responses on their offers within two or three days, plus many lenders are painting and replacing flooring to make their foreclosures more attractive to buyers.  Frequently the lender is motivated to get the sale closed quickly in order to get it “off of their books”.  The advantage to purchasing a bank-owned property is, like short sales, instant equity and more certainty of when and if the buyer will be able to close on the house..  Disadvantages are also the “as-is” aspect and additional closing costs to the buyer. Also, since they close more quickly, there is more competition for the bank-owned properties than short sales.

Buyers should also be aware that they are still well protected and even if the home is being sold “as-is” they can still get an inspection and the transaction is contingent on the buyer being satisfied with the results.  As always an experienced Realtor can help you navigate the process.