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Short Sales vs. Foreclosures

September 28th, 2012 by

Is it just me or are there less foreclosures and a shift towards more short sales in today’s real estate market? I wanted to address some issues and offer a few tips on how to navigate through a short sale and foreclosure. With the increase in short sale business, we have found that there are a different set of challenges, but also different opportunities.

Short Sales vs. Foreclosures

One of the biggest differences between buying a short sale and buying foreclosures is the presence of the homeowner in the transaction. When working through a foreclosure transaction, the bank has taken the house back from the home owner and will typically market the property “as is.” However, in a short sale transaction, the owner is often-times still living in the property. This gives an investor a tremendous advantage in assessing a property as compared to buying a distressed foreclosure.
For example, if the property is occupied, the furnace and/or air conditioning system is probably working (this can be one of the biggest expenses associated with rehabbing). In addition, a house that is currently being inhabited will likely have functioning electrical and plumbing systems. Again, where this may be a mystery with a distressed foreclosure, the interaction with the homeowner during the short sale will typically enable the investor to fully assess the property before the purchase. Foreclosures currently on the market have been “winterized” and in a state that does not allow a potential investor or purchaser to inspect the electoral and plumbing fixtures on their initial showing. Whenever a contract for a foreclosure has been ratified the purchaser/investor has the ability to perform a home inspection and the listing agent will schedule to have plumbing and electrical turned on for these inspections.

Negotiating Short Sales

Another interesting dynamic with short sale transactions is the ability to negotiate with the homeowner. Understand that most homeowners in that situation are very motivated to work through a short sale as the impact on their credit is much less than a foreclosure (as well as a possible deficiency judgment associated with a foreclosure). As a result, we have found that there is opportunity to ask for a little more from the homeowner than you could with a foreclosure.
For example, we are closing on a short sale tomorrow where we specifically outlined in the contract that we wanted the homeowner to leave the appliances (because they happen to be newer stainless steel appliances) as well as their washer and dryer. Not surprisingly, the sellers agreed to this as they were highly motivated to make this transaction work. This will save us over $1,000 on the cost of new appliances as well as another $400 from selling the washer and dryer. This scenario worked because our buyers were going with a Conventional type of financing where FHA and or VHDA require these appliances to be present at time of settlement.

Short Sale Tips

As an aside, we went by the house today and discovered the homeowners had moved out and taken the washer and dryer with them. This underscores two very important points when it comes to buying short sales:
1.) Always document in the contract exactly what you want from the sellers. In this particular instance, the selling agent tried to assure us that the sellers would leave these items for us, but luckily we were insistent that they sign our addendum specifically outlining our request.
2.) It is always a good idea to check the condition of the property either the day before or the day of a closing which is the final walkthrough. This is true for just about any real estate transaction, but especially foreclosures and short sales. You never know if the condition of the property has been materially altered in any way unless you view it for yourself before the closing.
While there are a different set of challenges associated with these types of transactions, it is important to find the benefits and use them to your advantage. One of the benefits of working through a short sale could be the time it takes to get an approval. If time is on your side than this could definitely be a good move.

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