Foreclosures vs. Short Sales
After going over last month’s local market statistics I’m going to cover an area that has a lot of interest – Foreclosures vs. Short Sales – to give you a concise explanation of the differences between the two including the advantages and disadvantages for buyers and for sellers.
October 2012 Market Statistics
Last month was a surprising month statistically. Typically sales follow a similar trend each year where sales are lowest in Jan and Feb, peak during March through June, start declining from July through October and dip in November but then jump up in December. In 2009, 2010 and 2011 sales had a slight decrease from September to October but this year there was actually a significant increase in sales from September to October as you’ll see in the chart below. In fact, not only was this October higher than any previous October back through 2007, but it was also 25% higher than the highest October in the past 5 years and about 30% higher than last October. This now makes the 10th consecutive month where the monthly sales were higher than the same month in all of the past 5 years!
Information for chart above was taken from PRO/Suncoast MLS from Jan 2007 thru May 2011 & from the MFRMLS for May 2011 thru Oct 2012. This information may or may not include all listed expired, withdrawn, pending or sold properties of one or more members of the My Florida Regional Multiple Listing Service.
Available inventory dropped a little last month to below 4.25 months even though there was an increase in the number of new listings in October as compared to September which is good. But for anyone concerned that there might be a bunch of properties that are sitting out there and waiting to come on the market which would then have adverse effects, even with the increase of new listings the sales were strong enough to make the overall inventory drop.
Information for chart above was taken from PRO/Suncoast MLS from Jan 2007 thru May 2011 & from the MFRMLS for May 2011 thru Oct 2012. This information may or may not include all listed expired, withdrawn, pending or sold properties of one or more members of the My Florida Regional Multiple Listing Service.
Both of these charts reaffirm that the local real estate market here is still showing a strong improvement and has recovered quite well. Prices are still down significantly from the peak, but they have been showing some gains this year and if the sales continue to stay strong the prices should continue a steady, gradual increase.
Foreclosures vs. Short Sales
These both fall under the category of ‘distressed property’ sales even though there is quite a bit of difference between them. In both cases the property will typically sell for less than what it would sell for as a normal or ‘non-distressed’ sale with the foreclosed property selling usually going for less than the short sale. But what are the advantages and what are some of the pitfalls of each type.
Foreclosures
With a foreclosure, the lender has received a legal judgment and has taken all the legal steps to take back the property from the owner and is now the legal owner of the property. The ‘seller’ is the bank/lender and the negotiations over purchasing the property is done with a representative of the bank/lender in their REO (Real Estate Owned) department.
One advantage of a foreclosure over a short sale, from a buyer’s perspective, is that the process is much faster since they already own the property and don’t have to do all the work involved in approving a short sale. Typically you can get a reply to an offer on a foreclosed property within 1-3 days and the bank/lender already knows what they are willing to accept.
There are some disadvantages though.
The first is that in many cases a foreclosed property will be in need of repairs and the bank/lender will provide no information on the condition of the property so you will have to rely on a home and termite inspection to find out what kind of repairs you may be looking at. In my experience I have seen foreclosed homes where the repairs that would be needed are so high that what looked like a good deal and great price at first turned out to be a bad deal. I have also seen issues such as termite damage and mold that were covered up so that even an inspection wouldn’t find them (this is based on actual experience with a foreclosed property I saw with clients on 2 separate occasions several months apart).
The second disadvantage is that in our current local market there is a shortage of properties available for sale in general and there is also a high demand for foreclosed properties from both investors and buyers who are purchasing for their own use. So it is fairly common that when a foreclosed property comes on the market that is a good deal there are multiple buyers who want to get it that put in competing offers and then the bank/lender lets everyone know that they have to put in their ‘highest and best’ offer by a certain date and time. This is more the exception than the rule now so the result of this is that prices for foreclosed properties are coming in higher than before and you will likely have to be prepared to pay cash since the bank will take a cash offer over one that involves financing even if the cash offer is lower.
Short Sales
A short sale is where the owner owes more in loans on the house that the amount a sale of the property can net after closing costs and commissions and they enter into a negotiation with the lender(s) to accept less than the full balance at closing. This then involves each bank or lender that has loaned money to the owner and where the property secures that loan, and each has to agree to the short sale price and terms.
An advantage of a short sale over a normal sale is that a buyer can often get the property for a better price. An advantage of a short sale over a foreclosure is that in many cases the owner is still living in the property and has kept it up and can provide information about the condition of the property.
The main disadvantage of buying a short sale property is that the process of getting the short sale approved by the lender(s) can sometimes be lengthy. This depends on which lender(s) are involved, how many there are and the knowledge and experience of the listing agent. A good listing agent who has adequate training in handling short sales can reduce the amount of time involved and increase the chances of success dramatically.
In addition, all the large banks and many of the smaller lenders have been working to streamline their short sale process as they have determined that the short sale route is much better for them than the foreclosure sale route. This is seen by the fact that the number of short sales have increased so much that they now outpace foreclosures and it is also seen by the fact that there are programs from all the major lenders, many smaller lenders and even a federal program that offers cash incentives to sellers to complete short sales. Here is a chart showing how foreclosures used to outnumber short sales but that beginning in July of 2011 that has now reversed where short sales outnumber foreclosures:
The advantage for a seller is that with a short sale they can avoid a foreclosure which has a much worse effect on their credit and in many cases have the balance of their loan forgiven.
I have several resources with information about short sales including TampaShortSaleAgent.com as well as a page on this site with videos that have information on short sales.
Hopefully this provides you with a better understanding of some of the differences between short sales and foreclosures that can help you decide whether you should consider those as a buyer. If you have any other questions about these either as a buyer or a seller, please feel free to contact me and I’ll do my best to help clear up any confusion or questions you may have.