A Short-Sale is when a person bought a property about 3 to 5 years ago at the highest price of the market (say a condo at $300K) and the buyer took an exotic balloon mortgage at 1% interest for the first 2 or 5 years then the interest balloons up to 8, 9 and even 10% afterwards. The intent was for those people to fix the property and flip it but, what happened is the market began to tank and those people missed the market. Now their balloons have exploded and their loan payments jumped from $600K per month to $3,600 per month. So, now they bought a house at $300K, owe about $240K but the present market value for their property is now only $175K. So, if they sell their properties at present market value, they will need to come up with $65K cash, which, of course, they don’t have. At that point, you ask the lender(s) to forgive the difference and close the property. Some other people need to make a move, for whatever reasons (a job transfer or the house is too small because they have a new addition to the family) so they are also in the same financial predicament and need to do a Short-Sale. However, in a Short-Sale situation, the lender does not own the property, so an offer has to be accepted between the buyer and the present owner. Then, the contract is submitted to the proper lender(s) (often time there are a first and a 2nd lender). The contract will sit at the primary lender’s desk for an undetermined amount of time (usually 2 months) until they get to it. If there is a second lender, that will lengthen the process because the second lender will try to get something back to recuperate some losses – the battle between them begins. After 4 to 5 months, they will give us an answer saying that they probably want more or else. Again, usually the buyer will not go up and walks away from the deal.
A foreclosure is quite different: In a foreclosure instance, the primary lender is now the bona fide owner of the property after having been awarded the right of ownership by a foreclosure judge. The second and/or 3rd lenders are completely out without a penny. This allows the lender to hire a real estate agent, place the property for sale and entertain offers. But the catch to that is that the lenders have been inundated by so many foreclosures in the past three years that they have finally figured out how to sell those properties. They have created what I call a “blind auction” which means you make an offer at the full asking price, then the lenders respond back in a few days saying “we have had multiple offers and you need to came back with you best and final offer” (there is no way for anyone to verify that.) People tend to bid up and often times, they may be bidding against themselves. Right now, the proof of that is when they close; we can see what the asking price was and how much they closed for. Don’t get me wrong, there are foreclosures that take forever to sell or that will be sold at substantially less than the asking price but there is a reason for that: everything is relative to location and aesthetic. Those properties that are sold at much less than the lenders asking prices are because they are dumps and no-one wants them.
Doing short-sales is quite tedious a process and it takes time. Often times, one can find quite a treasure in a foreclosure but, you kinda have to be here for that and when it strikes you, you need to make an offer immediately without flinging and be prepared to go higher than the asking price.