What’s The Difference Between Short Sale, Pre-Foreclosure, and Foreclosure?
| Realtor.com®
We posed the following question to agents across the country. Below are the responses we received…
What is the difference between short sale, pre-foreclosure, foreclosure and how do they differ in regards to when to make offers? What exactly comes first second or third and any auctions or whatever after…how can public buy these foreclosed deals?
Answer one:
In a short sale—the owner is selling and doesn’t have funds/equity to close the transaction and needs short sale approval from lenders. The owner typically owes more than market value of property and may or may not be in pre-foreclosure. If the lenders approve they will take it short as far as the mortgage owed.
Pre-foreclosure means an owner is greater than 90 days late on payments and lender has started the foreclosure process with a notice of trustee sale.
In an auction situation, the borrower didn’t correct the arrears of their default and the trustee is auctioning the property to the highest bidder.
Foreclosures are bank owned properties.
You can buy the property in any one of these states with caution and due diligence. Short sales and foreclosures are typically listed with a Realtor® and come with a lower risk. A buyer can get a mortgage for a short sale or foreclosure.
Auctions come with risk. A buyer will need to provide all cash in most cases. If you buy you assume all liens, IRS liens, and other mortgages possibly tied to the property. Due diligence is required!
In pre-foreclosure status, an owner often isn’t ready to sell and move. You need patience and due diligence to purchase.
—Kevin Sucher is a Realtor® with Prudential Northwest Properties in Portland, OR.
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Answer two:
A pre-foreclosure is when a property owner has received a notice of default and foreclosure can be described as imminent.
A foreclosure is when the bank has taken action to foreclose on the property. In some states this may include judicial action. The trustee steps in and the property is scheduled for auction at the courthouse.
A short sale is when the property owner owes more on the mortgage than the market value of the property and is asking the bank to accept a short payoff of the loan. In a short sale, the property owner may or may not have missed mortgage payments.
Check your local paper for public notices that announce foreclosure auctions held at properties or the courthouse. Keep in mind that foreclosures bought at the courthouse are bought without warranty, sight-unseen, and with no opportunity to view the properties beforehand.
Short sales are listed by a broker. Contact a local Realtor® to assist you in finding short sales. In a short sale you may wait months to receive an answer from the bank, and the bank may end up saying no. But you will likely get the opportunity to have an inspection.
—Cathy Baumbusch is a Realtor® with Re/Max Allegiance in Alexandria, VA.
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Answer three:
Contacting a local Realtor® is your best bet for information. Basically, a foreclosure is a home that has been foreclosed by and is now owned by the lender. Foreclosed homes will eventually be listed through a listing agent, but could take months to come on the market.
A pre-foreclosure is a property in the process of foreclosure but is still legally owned by the owner. It may or may not be a short sale. A short sale is when an owner is selling a home worth less than the mortgage owed on the home. Lenders may agree to take a short on the mortgage to release it for sale. Short sales can take months to close, if they do close at all.
—Beverley Hourlier is a Realtor® with Hilltop Chateau Realty in San Diego, CA.
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Answer four:
Foreclosure is the legal process that the bank initiates to take a property back due to non-payment. It can begin once a borrower has missed three consecutive payments. The foreclosure is complete once the lender auctions the property.
The pre-foreclosure process is when a lender files a Notice of Default against a borrower. The period typically last three months and the borrower must do something to fix the delinquency (payment arrangements, modification, short sale, or deed in lieu) or the home will be auctioned. The pre-foreclosure period can take much longer than three months depending on the bank.
A short sale is when a lender agrees to take less than what is owed on the loan. The goal is to negotiate with all lien holders so that they not only accept less money than what they’re owed, but they also settle the debt and release the borrower from any further liability once the short sale is closed.
An REO (Real Estate Owned) property is just another way to say a property is bank owned. For many investors this is the way to go. This is when the bank has attempted to sell the home at auction and had it revert back to the bank. In this case your Realtor® is dealing directly with the bank. In a short sale, your Realtor® works with the seller’s agent and the seller’s agent is then deals with the bank.
—Paola Martinsen is a Realtor® with Equity Real Estate – Premiere Elite Branch in Murray, UT.
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Answer five:
A short sale happens when a property is sold for less than what is owed on the property. The investor who owns the loan on the property is asked to release their lien, allow the sale, and absorb the loss. The property isn’t necessarily in pre-foreclosure or foreclosure. Some short sale transactions are completed even when a seller hasn’t missed a payment.
Pre-foreclosure means the seller has missed at least one payment and the bank is preparing to foreclose. A home in pre-foreclosure may or may not be a short sale. If a homeowner is behind on their payments, and the home has equity, it can be sold as a home in pre-foreclosure. However, it isn’t a short sale because the proceeds will cover the liens on the property. There are times when a home in pre-foreclosure is referred to as a home in foreclosure.
Foreclosure means the investor who owns the loans on a property has taken back the property for lack of payment. It is a process. In California, foreclosures are sometimes sold to a third party on the court house steps, listed with another Realtor®, or sold in an online auction. A home that has gone through the foreclosure process and taken back by the bank is referred to as an REO.
If you are interested in buying a foreclosure, I’d recommend that you find a qualified Realtor® and ask them to find foreclosures for you.
—Tracey Martin is a Realtor® with Realty World Premier Associates in Salinas, CA.