Whether you’re attempting to sell Big Bear real estate or you’re searching local real estate listings as a potential buyer, it’s important to know the difference between a foreclosure and a short sale. Foreclosure is generally a worse outcome than a short sale, if you are the seller, but as a buyer of a distressed property, a short sale is often the more difficult process to negotiate through.
Foreclosure for Owner
A property that has been foreclosed on means that the owner did make the monthly mortgage payments and the lender has taken ownership of the property. How much time you have without making a payment before your property is seized and sold at auction varies from state to state, usually between 4 months and 1 year. This period is called pre-foreclosure. Once pre-foreclosure ends and you’re unable to make the loan current, your property goes back to the bank.
Short Sale for Owner
You may be able to prevent a foreclosure by considering a short sale. A short sale is actually a lengthy process in which the distressed owner makes an agreement with the lender to sell his house for less than he owes. Since foreclosures are more expensive for lenders, they often agree to the short sale and forgive the balance owed from the owner, though certainly not always. Keep in mind that in many cases the IRS considers the balance forgiven to be taxable income and you may owe tax on that amount. It is always recommended that you check with your tax accountant on any real estate sale and a short sale is just as important.
How Your Credit Is Affected
Both types of sales are considered “not paid as agreed”, so they will both negatively impact your credit score. After a foreclosure, you can expect your FICO score to drop by as much as 200 points and stay on record for up to 10 years. With a short sale your score can drop at least 75 points or more but is generally considered less serious than a foreclosure.
The major negative to your credit is all of the missed payments during the foreclosure process. They add up, and then you take a short sale or foreclosure to the record and it really takes a bit. Future lenders generally look at a foreclosure and short sales as a serious red flag, but you can still get financing on a home purchase within a few years. It is best to check with a lender prior to making any purchase if you have a foreclosure or short sale on your record.
Buying a Foreclosure Property
In CA, foreclosure properties have to be initially auctioned at a trustee sale. If not sold to any bidders at an auction (which includes about 70%-80%), then the property is simply owned by the lender, often called REOs or real estate-owned properties. In either case, the seller or owner is taken out of the equation and the buyer negotiates with the bank or lender, unlike the short sale where there is owner involvement. It’s often safest to buy directly from a bank, through your real estate agent, instead of at trustee sale auction, to avoid unknown issues such as tax liens or structural problems. Don’t confuse the other types of auctions that occur as well, where the owner is already the bank or a standard seller using the auction process as another marketing tool to sell a home. There’s a big difference between trustee sale auctions (cash, as is, no escrow, no title) and standards auctions (inspection period, escrow process, financing, etc).
Buying a Short Sale
Despite what the name implies, the process of a buying a short sale property can be a long one. Once the owner accepts an offer, he sends it to the lender for approval. Even if an owner accepts your offer, the lender’s approval is the one that matters and that can take quite a while. There is more paperwork involved in a short sale than a regular sale, or even a foreclosure, and lenders tend to drag their feet on short sales.
The real estate professionals at The Tim Wood Group are experts in both short sales and foreclosures, as there are many nuances to completing these complicated transactions successfully. If you are considering buying or selling Big Bear real estate in today’s challenging market, make sure you have the best team in your corner, The Tim Wood Group.
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