A big part of the real estate market right now is made up of foreclosures and short sales. Foreclosures are bank owned properties, homes that are owned by the lender because the home owner couldn’t make their mortgage payments. Short sales are pre-foreclosure properties where the home owners owe the bank more than the value of their home. Foreclosures in the Chicago area used to be a tiny percentage of the homes sold. But over the last few years with the down turn in the housing market and the economy, the percentage has grown and this year foreclosures have exploded. It is a sad sign of the times that these homes are the most active part of the market. It is a real tragedy when a family loses their home (though a good percentage of the foreclosures are investments and speculations gone bad). It is also bad news for the community and a real problem for the bank that holds the mortgage or owns the home. But if you are in the market for a new home, buying a foreclosed property or a short sale can mean big bargains.

There are a lot of bank owned properties on the market, but short sales are the fastest growing segment. Earlier this year short sale properties were being negotiated, but the chances of their closing was pretty iffy. Banks would sit on the contracts for months at a time. Meanwhile the homeowners would get further and further behind and the home buyer would often lose interest in waiting and move on to another property. That situation has changed over the last few months. Banks have gotten more realistic about the market and have gotten much more aggressive in responding to short sale offers. What used to take months for an approval may now come together in a few weeks (still longer than a normal contract). Short sales can be a win-win-win. Good for the bank who holds the mortgage, good for the seller having trouble paying for the mortgage, and good for the new buyer.

From the bank’s perspective, the worst thing that can happen is when they have to foreclose on a home and take possession. Banks make their money by collecting mortgage payments, and a foreclosure means that they own a property that they don’t want, and aren’t equipped to take care of. It also means big legal fees, extra time lost, and lots and lots of expenses for a property that is worth less than what they originally made the mortgage for. Their motivation is to get rid of this problem as quickly and with as little cost as possible. A short sale means that they take a one time loss and they know exactly how much it will cost them. This avoids having to take the time and effort of going through the foreclosure process, less legal fees, and gets a bad loan off the books in a quicker time period. This is a win for the bank.

For the seller it’s a win too. A short sale is going to be a bad mark on their credit, but not nearly as bad as a foreclosure. A short sale stops the pain and brings a bad stage in their life to an early end. They can then work on rebuilding their credit and getting their lives back to normal.

The advantage for a buyer is that they have a chance to strike a real bargain with the bank. The price and terms are negotiable, and the bank’s feelings won’t be hurt if you come in low. So this can be a big win for the buyer. Short sales are done a little different than with a normal contract between a buyer and a seller. The buyer first negotiates the price and terms with the home owner, but then the contract must be approved by the bank that holds the mortgage. They can come back accepting the contract as it is, or they may make a counter offer. When making an offer for a short sale you may want to put in a time limit for a response.

Foreclosure and short sale properties are financed like any other real estate, but there are some specific needs to keep in mind. I’ll go over what to watch out for in my next post.

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