Although most people have heard of foreclosures and short sales, I find many don’t have a clear understanding of them and how they work. This is by no means a comprehensive explanation, but is intended to give you a better understanding of foreclosures and short sales in Minnesota (laws vary from state to state), which comprised over 25% of closed sales in the metro area the first quarter of 2008.
Foreclosure properties, also sometimes called REO (Real Estate Owned) properties, are owned by the bank. In simple terms, the former owners failed to make payments and the bank repossessed the property.
A common misconception is that an insider track to buying foreclosure properties is at the Sheriff Sale stage of the foreclosure process, where they can be purchased for the balance of the mortgage. While this may be a good idea in some other states, 99.9% of properties sold at Sheriff Sales in Minnesota are sold to the lender.
Why? Because in Minnesota if you get the winning bid you must pay the entire amount in cash at the sale but you don’t own it yet. You get a certificate of remdemption and your funds are held during the Redemption Period of another 6-12 months. During this time the owner can ‘redeem’ the property by bringing the loan current or selling and paying off the loan. In that case you would simply get your investment back. What may be more concerning is during this time the seller makes no payments but still has full use of the property. This means they can remove or damage cabinets, appliances and mechanicals, kick holes in the walls and doors, break windows, etc. At the end of the redemption period, the holder of the certificate of redemption receives the house ‘AS-IS’, which may be very different from the condition of the property you thought you were buying.
If you are buying a foreclosure property owned by the bank you are also buying the property ‘AS-IS’, but the property is vacant so what you see is what you get. The current owner (the bank) never lived in the property, and it is typically dirty and in disrepair, with some personal possessions of the former owner left behind…may have broken or missing plumbing pipes, etc…often a ‘distressed’ property.
In a negotiated short sale, the bank agrees to accept less than the total amount due on the mortgage as full payment when the property is sold.
Where the bank is the seller with a foreclosure, ‘people’ still own the property in a short sale and may still be living there. You negotiate your offer with the owner as with a traditional sale but it is subject to bank approval. Condition can vary, but is frequently similar to that of foreclosure properties.
If you are selling, don’t get excited that you may be able to negotiate a short sale simply because you cannot sell your property for the total amount owed on your mortgage. It’s much like applying for a loan, only in reverse…you must document that you do NOT have the ability to pay to get bank approval.
If you are buying, don’t get excited that a short sale means a short time from purchase agreement to closing. If you are fortunate to find a pre-negotiated short sale it can close quickly…I recently had one close in 13 days…but that is highly unusual! Because there are multiple parties involved most short sales are a long, slow process…I am still waiting for bank approval on a short sale offer made in February! Response time and closing are typically much quicker with a foreclosure than a short short.