Understanding Distressed Properties
With all the news about bank-owned, foreclosed, and short sale homes, the real estate market can feel overwhelming, especially with today’s economy. But what do these terms really mean, and how do they affect buyers, sellers, and lenders? Let’s break it down.
What is a Short Sale?
A short sale happens when a homeowner owes more on their mortgage than the property is worth. This often occurs when the homeowner can no longer afford the mortgage payments. In some cases, the homeowner may be able to sell the house for less than what they owe, with the bank’s approval. The goal of a short sale is to avoid foreclosure, which can be even more damaging to the homeowner's credit.
The bank usually has to approve the short sale, and sometimes they may agree to reduce the amount owed. However, in some cases, they may not agree and will hold the homeowner responsible for the full debt. Short sales are often priced lower than similar homes, which can make them attractive to buyers. However, they can take a long time to close—sometimes several months—because the bank needs to approve the sale. Not all short sales go through, because the bank may decide to reject the offer if it thinks it can lose less money through other means.
While short sales can be a good deal for buyers, they are often slower and more complicated than regular sales. However, they are usually better for the homeowner’s credit score than a foreclosure.
What is Foreclosure?
Foreclosure happens when a homeowner has missed several mortgage payments, often due to financial hardship like job loss, large debts, or other personal issues. After missing payments, the homeowner may not be able to catch up or negotiate with the bank to avoid foreclosure.
The foreclosure process begins when the bank officially declares the loan in default (usually after about three months of missed payments). After this, the bank will schedule a foreclosure auction where the home will be sold to the highest bidder. If no one buys the home at auction, it becomes bank-owned.
At a foreclosure auction, the bank can evict the homeowner immediately if the property is sold. If no one buys the home at the auction, the bank will take ownership and try to sell the home themselves. In some cases, the homeowner may be allowed to stay in the house until it sells, but the bank will ultimately take control.
Homes that go through foreclosure are often sold at lower prices, but sometimes they may be priced higher, especially if the homeowner owes more than the property is worth.
Bank-Owned Homes
A bank-owned home is a property that has gone through foreclosure but didn’t sell at auction. Now, the bank owns it and is looking to sell it. The bank will list the property just like a homeowner would, and they might even allow the former homeowner to stay in the house until it sells. Bank-owned homes are often priced lower than market value, but that isn’t always the case.
What’s the Impact on Homeowners?
All these situations—short sales, foreclosures, and bank-owned homes—result in the homeowner losing their property and taking a hit to their credit score. The best way to avoid these issues is to stay on top of mortgage payments and communicate with your lender if you’re having trouble making payments.
While short sales are often less damaging than foreclosures, none of these situations are ideal for homeowners. Staying current on payments is the best way to protect your home and your financial future.