Foreclosures, short sales and bank owned properties [an overview]
Recently, a new reader commented that when I used the term "short sale", he didn't understand what it meant and thought it was just real estate "jargon". There is a lot of talk about foreclosures, short sales and bank owned properties so here is a brief overview of each to help you understand the difference between them.
Foreclosures: A foreclosure property is one where the owner is behind on their payment and the bank has issued a lis pendens or pending lawsuit and scheduled a day for a sale. During the time between the issue of the lis pendens and the sale, the homeowner can sell their home to pay off the loan or take other measures to avoid foreclosure. At the sale, the home is sold in a bidding environment at the County Courthouse and the purchaser must pay for the home with 5% down in cash with the balance payable within 30 days. Buyers have very little time available to research title, have a home inspection or to arrange for financing so you need to take great care to know exactly what you are purchasing. While foreclosure auction sales are interesting to attend, very few properties actually sell on the Courthouse steps.
Please note that South Carolina is a judicial foreclosure state and that the foreclosure process varies from state to state.
Short Sale: If a homeowner wants to avoid foreclosure by selling their home but can't sell it for what is owed, they may attempt what is known as a short sale. A short sale is where the bank agrees to accept less than what is owed when the home is sold. In a short sale, the homeowner can accept your offer but that offer is contingent upon 3rd party lender approval so it doesn't mean that it's a done deal. The lender or lenders must also accept the offer. In most cases it can take several months for this approval to take place so don't start packing your belongings if you plan on buying a short sale unless you have 3 to 6 months minimum for the process to take place. In purchasing a short sale, you do have time to have a home inspection and arrange for financing.
Bank Owned: When a home is not sold at the Courthouse sale, it goes back to the bank or mortgage lender and becomes Real Estate Owned or REO also known as Lender Owned or Bank Owned property. Most of these homes are sold "as is" and are listed with a real estate agent in the Charleston MLS for sale. These homes have had the outstanding liens and additional mortgages removed so they can be a much cleaner transaction than buying a foreclosure at the Courthouse. The acceptance time typically takes days, not months like with short sales. In many cases, bank owned properties can be in very distressed condition but I've also seen many that are in reasonably good condition. As with short sales, you do have time to have a home inspection and arrange for financing but in many cases, the seller will require you to be pre approved for financing with their representative (or provide proof of funds if paying in cash) before considering your offer although you may still use your preferred lender to complete the transaction.
You can view most bank owned properties listed in the Charleston MLS here.