Short Sale Vs. Foreclosure: Which Is Better For Buyers?

Feb 21, 2024

7-minute read

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The market for buying a new home is often fast-paced and competitive, so finding a great deal may require a bit of effort.

Looking for a new home that’s below market value and you have a little determination and patience, a so-called “distressed property” might actually be just the property for your situation.

Let’s take a close-up look at two of the most common types of distressed properties – short sales and foreclosures – so you can determine which would be the best fit for your potential investment.

The Difference Between Short Sales And Foreclosures

Homeowners who’ve suffered a loss of income or experienced major life changes can fall behind on their monthly mortgage payments and find themselves looking to sell their home short to avoid default. If the financial hardship the homeowner is facing becomes too great, their property may become “distressed” – meaning it’s under foreclosure, preforeclosure or bank/lender control.

Let’s take a closer look at short sales and foreclosures and how these two types of distressed properties compare.

Short Sales

A short sale occurs when a mortgage lender allows the homeowner to sell the house for less than the amount they still owe on the mortgage. This helps the home seller by allowing them to avoid foreclosure, which is typically more damaging to a credit report than a short sale.

Foreclosures

A foreclosure is when a home is seized and put up for sale by the mortgage lender or bank. Every mortgage contract has a lien on the property that allows the lender or bank to control the property if the homeowner stops making mortgage payments.

Now let’s take a look at what preforeclosure is and how it differs from a short-sale transaction.

Preforeclosure Vs. Short Sale

Preforeclosure is the first step in a foreclosure proceeding, which often happens after a homeowner has failed to make 3 – 6 months’ worth of payments. Borrowers in preforeclosure can avoid foreclosure in one of three ways:

  • Pay the past due balance in full
  • Work with the lender to modify the mortgage terms and reduce their monthly payments
  • Sell the home through short sale or deed in lieu of foreclosure.

Preforeclosures that go to market and sell and short sales are similar in that they’re both conducted by the owner or a real estate agent. A real estate agent who has previous experience with distressed properties can be incredibly helpful and expedite the purchase timeline in some cases.

However, short sales can be a little more challenging because the bank is involved and has the power to reject offers that the owner has accepted. Banks can be slow to respond, and agents familiar with the process can anticipate the necessary paperwork and potential problems with lienholders.