I wrote a blog post on the topic which is pretty thorough... but here's the basic gist:
Short Sale - A short sale occurs when a property owner is upside down on their mortgage (they owe more than their home is worth) AND they can no longer afford the mortgage payments. ,
Some lenders, rather than foreclose on a property are willing to settle for less than they are owed. They arenâ€™t really being kind or generous - itâ€™s just that banks arenâ€™t in the business of buying and selling real estate, but rather, buying and selling money. They have no desire to keep homes in their portfolios, and in most cases, lenders would rather settle for a portion of what is owed to them and forget the whole thing ever happened.
The Short Sale purchase process starts rather simply. You see a property that you like, you make an offer on it, and the seller accepts the offer. Well - you still have another major hurdle to jump through. The offer now must be submitted to the lender, or in some cases lenders, and this is where the meditation class you took in college pays off.
Once the lender receives your offer, they rarely accept it right away. Typically it takes weeks for them to approve it (or reject it) and Iâ€™ve even heard of it taking months! During this time, the lender is reviewing the sellerâ€™s hardship package, they are reviewing your offer, and they are waiting, hoping and praying that another offer better than yours will come in. Of course, you can add deadlines and such to your offer, but the reality is that the bank will decide only when itâ€™s good and ready.
Now, if the bank accepts your offer, then itâ€™s pretty much like any other sale. Unless of course, the seller had a 1st loan and a second loan that they canâ€™t afford to pay off. In this case, things get rather complicated rather quickly, because now you have two separate banks that have to agree to forgive part or all the sellerâ€™s debt rather than foreclosing on the property.
Sale Day (Courthouse Auction) - Letâ€™s assume the bank rejected the short sale. Instead, they opted to file a notice of default followed by a notice of sale which led up to the Sale Day, where we are now. Sale Day occurs on the courthouse steps in the county where the trust deed was recorded. You can find out in advance which properties will be auctioned off on which day by looking in the local newspaper, going to the local courthouse, or contacting a REALTOR familiar with foreclosures.
The first thing to keep in mind is that your credit is no good on Sale Day. In fact, if you donâ€™t have the money, either in cold hard cash, or in the form of a cashierâ€™s check, you have no hope of winning the property on Sale Day.
In addition to the ALL CASH policy, you donâ€™t have the opportunity to do any inspections, you donâ€™t get title insurance, you donâ€™t have disclosures from the lender, you donâ€™t have crap. You may as well be throwing the dice. Why am I being so dramatic? Well - your property might come with LIENS ALREADY AGAINST IT - including various unpaid utilities or mechanicâ€™s liens. If you buy the property, the liens come with it and itâ€™s YOUR duty as the property owner to take care of them.
What about the price, you ask? Well - the lender is going to want to make back what they were owed by the former homeowner - so the starting bid will likely be the amount of the first note. Once again, you can get this information from a REALTOR.
Sale Day is frankly kinda scary. You might walk away with a ridiculous bargain, but you might walk away with a HUGE liability on your hands.
REO (Real Estate Owned) - So Sale Day often comes and goes with no offers on the courthouse steps. The bank is left with the property on their books - and as Iâ€™ve mentioned before, banks arenâ€™t in the business of buying and selling real esate, so they want to get these properties off of their books rather quickly.
Now this is the time to find bargains! Banks usually unload these properties at a significant discount because they donâ€™t want to hold on to them. The bankâ€™s representatives usually respond to the offers rather quickly, and while youâ€™re unlikely to find a property in pristine condition (former owners often take anything of value in the house from appliances to lightbulbs and doorknobs), you are likely to find a damn good deal.
But as with all things, there is a catch - you need to be ready to hustle! You have to move fast to grab one of these deals and you wonâ€™t have time to think long before you make an offer. However, if your offer is accepted, you often have the ability to do inspections (although in a competitive situation, you may not have that opportunity either.) Again, you should be working with a savvy REALTOR to make sure you donâ€™t miss out on one of these deals.