What’s the Difference Between Foreclosure and Short Sale?

What is the difference between a foreclosure and a short sale? And which is the better deal?


Los Angeles Foreclosures

A foreclosure or REO (which stands for Real Estate Owned) is a property that the bank has already taken back through the foreclosure process. The owner has moved out and the bank holds legal title to the property. In some states the previous owner still has a “redemption period” to get the home back from the bank. But foreclosures in Los Angeles are final and the bank can turn around and sell them right away. An offer on a foreclosure property can take anywhere from one day to two weeks to be accepted by the bank and usually 30 to 45 days from acceptance to close. Fannie Mae foreclosures are among the best foreclosure deals on the market.

Los Angeles Short Sales

A short sale or pre-foreclosure, on the other hand, is where the owner owes more money on the property than it is worth and is trying to sell it for less than the amount owed. An offer to purchase may be approved by the owner (who is not going to walk out with any cash anyway), but the contract is still subject to final approval by the bank (or banks if there is more than one mortgage on the property). The bank has to agree to take less than what they are owed. Once a bona fide offer is received, the seller is required to write a hardship letter stating why they should be eligible to do a short sale. They must also provide bank statements, paycheck stubs, and a financial statement to show that they cannot make the payments. In addition, the seller’s real estate agent must provide a market analysis of the most recent comparable sales to justify the selling price. The bank will also send out their own appraiser some time during the process to get an independent analysis done.

Just the approval on a short sale in Los Angeles can take anywhere from 60 to 120 days, and sometimes even longer. Until the bank approves the sale, the buyer is in limbo, not knowing whether they will actually be able to buy the home. There is, unfortunately, no way to speed up the process. The banks won’t even talk to the real estate agents or sellers in the meantime to let them know what the status of the approval is. Often the property goes to foreclosure sale before an approval can be generated.

In either case, don’t expect to have repairs made or receive a lot in buyer concessions (closing costs paid by the seller). Most Los Angeles short sales and foreclosures are sold “as is, where is.” Banks will only be willing to do the minimum repairs to a property that will allow it to be financed. (Missing flooring, missing stove or A/C, etc.) On a short sale the seller does not have the money to make repairs at all.

Why Foreclosures May Sell for Less

Lately we have seen many short sales in Los Angeles homes and condos that have been foreclosed upon even though there was a good offer on the table. The kicker is, after the foreclosure is complete the bank often turns around and lists the property for LESS than the offer that was tendered.

Though this doesn’t seem to make any sense, there is actually a good rationale behind the bank’s actions. If a bank approves a short sale, they cannot write off the loss (the difference between the mortgage owed and the actual sales price). With a drop of more than 50% in the Los Angeles real estate market, a home that was worth $300k might now only be worth $150k. If the buyer got in with no money down originally, the bank is facing a principal loss of $150k plus expenses and past due interest payments.

But if the bank forecloses on the property, in some cases they can write off 100% of the loss. Now they can afford to sell that $150k home for $130k and still come out ahead of the short sale scenario by taking the $150k+ write off on their taxes.

Either way, there are great deals to be had, but a great deal is not necessarily how much you can “get off” the sales price. Many foreclosures and short sales sell well above the listed price and are still great deals. A great deal is determined by how much you pay in relation to the home’s true value.