Foreclosures vs Short Sales

Hello Hampton Roads,

Let's take a look at Foreclosures vs Short Sales.
Do you know the difference between a Foreclosure and a Short Sale?

Our real estate market has both kinds of distressed sales, and today, we’ll take an in depth look at both.

A foreclosure is a process that occurs when the lender or creditor takes possession of the property because of the borrower’s failure to pay. A foreclosure property is also known as an REO, or Real Estate Owned (by the bank). To recoup their losses, the bank lists these properties with a qualified Realtor® to sell. Since banks are not in the business of owning real estate, these properties can be a source of potential bargains. (Check out my post on How to Buy Bank Owned Homes)  However, foreclosures are devastating to the financial well being of a borrower with effects that can be long lasting.

A short sale, on the other hand, is an increasingly popular tactic for financially troubled homeowners to possibly avoid foreclosure. Short sales occur when the lender or creditor agrees to sell the property for less than the mortgage amount. When the bank agrees to accept less than the pay off amount, the balance is “short” the amount owed, so hence we have the term, short sale. Short sales are essentially pre-foreclosures. The owner of the home has a financial hardship and has either missed mortgage payments or can no longer continue to make them so the property is on its way towards foreclosure.

Here are some of the pros and cons of both:

• Foreclosure
• Pros
• Bank has set the price so there is no guessing concerning the bank’s approval the sales price
• Bank has cleared liens in foreclosure
• Closing is relatively quick, usually within 30-60 days
• Generally the bank’s preservation company maintains the lawn and takes care of safety issues or other issues that may degrade value or cause damage
• Cons
• Lower sales price re-sets the price point in the neighborhood which lowers assessed value and reduces the tax base
• Ruins the owner’s credit—there is usually a 250-300 point drop in credit score and the foreclosure remains on credit history for 10 years or more
• Very damaging to those who have a security clearance and can be grounds for termination or reassignment
• Seller is eligible to receive a Fannie Mae backed mortgage after 5 years –a much longer term than with a short sale.

•  Short Sale
• Pros
• Less damaging to seller’s credit especially if seller is current on all other payments and a short sale is not reported on credit history
• Not a challenge for owner’s with security clearance
• In most cases property will sell for a higher price than if the property were foreclosed, thus keeping neighborhood property values higher than a foreclosure sale
• Seller is eligible to receive a Fannie Mae backed mortgage after 2 years
• Cons
• Can take an extremely long time to close—in some cases over a year
• According to Fannie Mae, in 2008 for every one short sale, there were eight foreclosures
• Bank may not agree to the price buyer and seller have agreed upon and the price may have to be renegotiated
• Seller may be liable to pay a deficiency judgment (the balance of the loan amount) to the bank if the bank agrees to the short sale
• Generally if the seller cannot make mortgage payments, he or she may also not be able to properly maintain the house

Both short sales and foreclosures have their own set of complexities and these sales are currently a driving force in our market as well as nationally. Any buyer or seller in this market would be wise to seek the guidance of a Realtor® experienced in distressed property sales. If you have any questions or are considering buying an REO or short sale, or selling your house as a short sale, feel free to contact me.


Thanks for Reading,


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Serving your Hampton Roads and Virginia Beach Real Estate needs.