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Important Real Estate News Pierce & Kitsap Counties, Gig Harbor and beyond.

Short Sale Vs. Foreclosure: What's The Difference?

Published on  by Jennifer Valente

Short sales have become more and more popular the last several years. But what exactly is the difference between a short sale and a foreclosure? Is a short sale financially risky, and is it worth buying one?  

Whether you’re a buyer or a seller, a short sale may be a great option to consider. For starters, short sales and foreclosures are two very different things. The general public is a little more educated on foreclosures than on short sales. Most people know that foreclosures are similar to a repossession of a vehicle, where the bank takes over the property, and is taking what they now own through a series of defaults from the borrower. 

A short sale is like a short cut, both for the borrower and for the lender. The borrower has and continues to default on the mortgage; however, by mutual agreement, is working with the bank to sell the home for less money than what is owed. Another difference is that when a property is in foreclosure, the bank hires a Realtor to sell, or goes into an auction process. In a short sale situation, the homeowner can hire a Realtor and still maintain some control. 

Benefits Of A Short Sale

Believe it or not, there are major benefits to everyone in a short sale (even the person who is in default). The immediate benefit to the borrower is that a short sale is not as damaging to their credit history as a foreclosure. Being in default is certainly damaging, but it is not irreparable. In addition, the borrower maintains dignity and control. Foreclosure is one of the worst blemishes one can possibly have on their credit. The emotional consequences are also far worse, as the homeowner truly loses everything. 

The lender also benefits from a short sale, as choosing a foreclosure process is very expensive for the lender. While the bank may come up "short" in the end with a short sale, the bank saves money by not having additional foreclosure costs. Homebuyers benefit from short sales, because many times they can negotiate less than asking price, since banks are highly motivated to get some portion of the loan back. Oftentimes, the price is less than market value!

How To Buy A Short Sale

First and foremost, find a Realtor who specializes in short sales. It may be a difficult challenge at first, but it is a key component as short sales are different than your average real estate transaction. Once you find your short sale expert, be sure to ask him or her to prepare a thorough market analysis on any homes of interest. Just because it is a short sale, does not mean that you are getting a good deal! 

Lastly (and this is crucial), ask your professional Realtor to include strong exit strategies in your offer. Just because the house needs work, the bank may not be willing to compensate you (and most likely won't compensate you) for repairs. If the inspection turns out to be a disaster, you want a solid exit plan in place. 

Key points to remember in purchasing a short sale: Competent Realtor & strong exit strategy!

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