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De-mystifying short sales and foreclosures

List of Miami Beach foreclosures

By now you’ve definitely heard a lot about so called “short sales” and “foreclosures”. In my market area, which is Miami Beach, Florida,roughly 25% of all Miami Beach condos that are being sold are either short sales or foreclosures. In some other markets, this number could be as high as 75-80%.

In either case, the percentage is high enough that these forms of “non-traditional” transactions are certainly worth a closer look if you are in the marketto buy (or possibly even sell) a property anywhere in the US.

What is the difference between a short sale and a foreclosure ?

Simply put, a property that has been foreclosed upon, has been taken away from the previous owner  via a judicial process and is then owned by the financial institution that initiated the process, in other words if you don’t pay your mortgage, your mortgage company will take your property and be the legal owner of it. If you own a condo and don’t pay your association fees, your condo association can also initiate foreclosure and become the legal owner of the property.

A short sale on the other hand, is a process where a homeowner is trying to sell a property that is worth less than they currently owe (I’m sure you’ve heard the term of someone’s mortgage being “under water”). Since the lender would therefore not get paid back in full, they have to approve the transaction before the sale can be completed.

I am a buyer and want to get the best deal, should I look for a short sale or a foreclosure ?

The short answer is, look for both, as well as traditional transactions, in other words, don’t worry about the technicalities, just find the deals first ! Since there are many different scenarios that can lead to you getting a great deal. An owner doesn’t necessarily have to be in distress in order to be highly motivated to sell at a price that could be a great deal for the buyer. Chances are however, that the best deals will be found amongst short sales and foreclosures. Your agent should be able to find the best deals for you and help you with the technicalities of the transactions, no matter if it is a traditional sale or a short sale or foreclosure.

What are the benefits and disadvantages of a foreclosure vs. a short sale vs. a traditional transaction ?

Let’s start with the traditional transaction, since it’s the easiest.

Buyer makes an offer, seller accepts offer (or counters it). Once an agreement is reached, you have a valid contract and closing can happen within 1-4 weeks thereafter.

Advantages: Quick, easy and straightforward transaction

Disadvantages: You have to find a motivated seller, plus the transactions can be rather emotional, especially on the seller’s side

How about foreclosures ?

Foreclosures can be great deals, however many of them are not priced as well as most buyers might think. I’ve actually seen lots of bank owned properties that were priced way higher than comparable properties in their market area.

Let’s assume you DO find a very aggressively priced bank owned condo (or house) and are certain that you want to purchase the property. You have your agent write a contract, submit it to the listing agent, who then submits it to the bank, which will then accept it and you got yourself a great deal ! Sounds easy, right ?

Well unfortunately it’s not quite that simple. There are many professional investors out there, keeping their fingers on the pulse of the market and jumping on every great deal as soon as it comes up. A well priced foreclosure might therefore receive a dozen or more offers within hours of hitting the market (or the MLS system). In order to win the bid, you would not only have to be quick, but also offer an amount that is very close to fair market value (often significantly above list price) as well have offer favorable terms to the lender.

It is very common for a cash deal to win the bid even if a competing buyer requiring financing is willing to pay a slightly higher amount for the property.  When it comes to foreclosure deals, it is definitely a seller’s market.

Advantages: Often well priced, fairly quick answer on your offer and reasonable quick closing timeframe

Disadvantages: Bidding wars are common, hard to actually place the winning bid, terms always strongly favor the seller

Now for short sales:

Short sales are almost a hybrid between the other two transactions in that you do have a seller that needs to accept and sign your offer, but then the complete offer package (involving lots of details from the seller’s side) needs to be submitted to the lender for approval. While only about 30% of all short sales close, I believe these are the 30% that are either handled by real estate agents that are well versed in the process or by capable third party negotiators. If you have an agent that has no experience handling short sales and / or – even worse – the listing agent, has no experience, but is still trying to handle it on their own….well, good luck ! Your chances of success are probably about as high as if you asked some random person to just give you their home.

If you do have an experienced agent and the time and patience to wait for 3-6 months to get an answer on your offer, short sales are however a great way to get very good deals !

Advantages: Generally a good way to score a good deal. Competition, while still possible is usually less than on a well priced foreclosure

Disadvantages: Slow process, I repeat, SLOOOOOOW process. Don’t expect to get any feedback on your offer for at least 60-120 days. List price could be unrealistic. This is another pitfall where you need an agent that is experienced and most importantly, that you trust, as they will have to figure out the fair market value of the property. Your offer needs to be at – or very close – to fair market value, to be considered since the lender will conduct an independent appraisal and reject any offer that is too far from what they consider to be the market value of the property.

Hopefully you find this quick review helpful. If you need further details or have any questions on any of the above, don’t hesitate to comment on this post or contact me directly.In the meantime, I wish you the best of luck in your hunt for a great deal on a miami beach condo or any other type of miami real estate.