Foreclosures vs. Short Sales

Short sales and foreclosures are often misunderstood and confused for one another. If they are differentiated, then they are usually considered to be inextricably linked together, though that is not the case. So, in this blog, I am going to compare and contrast the two.

Short sale - a short sale is a situation where 1) A property owner owes more on a piece of real estate than it is worth and 2) the owner desires to sell the property and 3) the owner does not have the means and/or desire to bring to closing the difference between the amount owed and the final sales price and costs associated with closing.

If a homeowner starts to get behind on his payments, then he may try to short sell the property before going into foreclosure (this is a good idea, although a recent report by cdpe.com showed that only 3 in 10 homeowners facing foreclosure actually speak to a real estate professional).

The biggest difference between a short sale and a foreclosure is the issue of ownership. In a short sale, the borrower still owns the home, and has the right to decide whether or not to sell. Once a property has been foreclosed upon, the borrower no longer owns the property and no longer has that right. As a bank owned property (or REO), the lender (or an agent or subsidiary) decides when and for how much to sell the property.

Foreclosure - can be a noun or a verb, "to foreclose" refers to the legal process of exercising a lender's right to take ownership of a property that was pledged as security for a now non-performing loan. A "foreclosure", as a noun, refers to a property that has been foreclosed upon and is now corporately owned (rarely, private individuals lend money that is secured by a mortgage on real estate, and they too may foreclose).

Here is a list of similarities and differences with respect to short sales and foreclosures:

Similarities                                         Differences
1. Bank involvement                             1. Bank owns a foreclosure, not a short sale
2. Additional paperwork                        2. Foreclosures close more quickly
3. Longer contract time                        3. Quicker foreclosure response time
4. Downward price pressure