There are many confusing terms out there today regarding "distressed properties." This article will discuss the different terms used in real estate, such as short sale, and foreclosure to help you understand what you are seeing.

Short sale

With the declining real estate market, many owners have found themselves "upside down" in their home, meaning they owe more than it's worth today's market. A short sale occurs when a home owner asks their lender(s) to accept less than the full loan payoff for their property.

Short sales, in most circumstances, are a way to avoid foreclosure. Although the lender will recover less than the total loan amount in a short sale, they may prefer this in lieu of foreclosure because the final expense for them will be less.

The bank, or lender, is not obligated to take a short sale and in most cases the process to get one approved is cumbersome and frustrating for the Buyer, Seller and the Realtors. Banks are overwhelmed with short sale requests and the approval process can take months. As a Buyer, only consider making an offer on a short sale listing if you have the time and patience to deal with the uncertain outcome. Generally short sales are an opportunity to get a nice home at a fair price, but probably not a steal.

Is a Short Sale Right

For You?

As a Seller, whether or not a short sale is your best option depends on your financial situation and the type of loan or loans that you have. If you still have the same loan that you originally purchased your home with (non-recourse loan) and you have never refinanced (recourse loan), you are protected under California law and the banks cannot file a judgment against you upon foreclosure. You may still have tax consequences. If you are considering selling your home as a short sale, consult with a CPA and an Attorney first along with a Realtor. A CPA can help you figure out if you may be insolvent at the time of the sale, in which case you will not report the 1099 or if you still have your original loan you may be excluded from reporting a 1099.

Generally, if there is no way to make the payments now or in the future, your lender will not agree to a forbearance or rate modification, you have previously refinanced, and your only other option is foreclosure, then a short sale may be right for you. With a short sale you can negotiate that the debt be forgiven so the lender can not file a judgment later. Also consult with a reputable bankruptcy attorney to see if a Chapter 7 is possible. With Chapter 13 you have to repay some or all of the debt anyway and pay the attorney.

In most cases, banks will not even consider a short sale request until your property is listed and you have an offer on the table, therefore getting that offer in hand as soon as possible is critical to getting the process started and being able to stay the foreclosure. Only an experienced Realtor should handle these sales.

Pre-foreclosure

A preforeclosure is basically a short sale or the sale of a home in which a notice of default has been filed. The owners of the home are in default of the loan and are trying to sell the home before it is taken through foreclosure, but often it's just a marketing term to attract attention to the property as being a distressed sale. Realtors use this term to create interest in possibly purchasing a home below market value. This may or may not be the case. Further research needs to be done on each home to determine its true value.

Foreclosure

Foreclosure is the process whereby the lender takes possession of the property following nonpayment on a loan. This is a very specific legal process with set timelines and outcomes. In a short sale situation, the home owner is the seller. In a foreclosure, the lender takes possession of the house and as a result, the homeowner is no longer a party in the sale.

Foreclosures are not sold by Realtors. Foreclosure properties are auctioned at a Trustee Sale at the court house in the county where the property resides. Foreclosure properties must be paid for in full with a cashiers check at the time of the auction. Only seasoned investors should consider this option.

When you purchase a home at a Trustee Sale, you could be at risk of various problems that are normally investigated by Realtors and title professionals, such as: title problems, superior loan pay offs, IRS liens, back taxes, tenants or owners still occupying the property, and/or structural problems. The price may seem good at auction (priced well below other houses in the neighborhood), but additional costs and risks may come after you try to take title.

Remember, there are many homes out there for sale that are not distressed properties. The owners have a lot of equity, are motivated to sell and have priced their homes to move quickly. Distressed properties are not always the best way to find a great deal.

To learn more about these and other real estate issues, contact Christina Hunter, a realtor with RE/MAX Olson & Associates, at ChristinaHunter@remax.net or on the web at www.CallChristina.net. She can also be reached by calling (805) 559-2318.