Short Sale vs. Foreclosure: What’s the Difference?

It can feel impossible to buy a house in today’s hypercompetitive, low-supply housing market. Fortunately, searching for homes listed on the market isn’t the only way to buy a home. Enter short sales and foreclosures.

These home buying options present additional opportunities beyond what’s on the market. Short sales and foreclosures offer buyers access to additional properties, which is especially helpful when inventory is low.

So what’s the difference between a short sale and a foreclosure? And is a foreclosed property or a short sale home in your future? Let’s find out!

What Is the Difference Between a Short Sale and a Foreclosure?

A short sale happens when a homeowner sells their home for less than the amount due on their mortgage and a lender agrees to a reduced mortgage payoff. A foreclosure occurs when a homeowner defaults on their loan and a lender seizes and sells the home to recoup their losses.

There are several other key differences between a short sale and a foreclosure:

Characteristics of a short sale

• Helps homeowners avoid foreclosure: Short sales allow financially distressed homeowners (such as owners facing bankruptcy) to avoid foreclosure.
• The homeowner selects the buyer: The homeowner must find a buyer and get approval from the lender to sell the home.
• The homeowner owns the property until it’s sold: The homeowner remains the owner of the property until the sale is complete.
• Amicable resolution: Because the homeowner and the lender are working together to get the property sold, any potential tensions are likely a lot lower.

Characteristics of a foreclosure

• The lender takes control and ownership: The lender takes control of a property after an owner defaults on their mortgage loan.
• The lender sells the property: The lender is responsible for listing and selling the property.
• It’s an as-is sale: Foreclosed homes are generally sold as-is, making the buyer responsible for any repairs that need to be made.
• Less property information: Lender descriptions of foreclosed properties typically offer less property information than a traditional listing. If you’re the kind of buyer who wants to know the history of a property or its major repairs, foreclosed properties may not work for you.

How Short Sales Work for Buyers

A short sale agreement generally involves three parties:

• The buyer: Short sales are priced according to fair market value but lenders may be motivated to sell to cut their losses. Which means a buyer may be able to get a great deal. Making them an appealing option for home buyers who are interested in buying a house or investment property at a discount.
• The homeowner: In these situations, a homeowner is typically dealing with financial hardship, behind on mortgage payments and eager to eliminate debt. And pursuing a short sale can help a homeowner avoid the severe consequences foreclosure would have on their lives and their credit.
• The homeowner’s lender: Before a lender agrees to be “shorted” the amount they’re owed on a mortgage (hence “short sale”), they will require you to present them with documents proving your financial hardship. The owner presents buyers to their lender, and the lender either accepts or rejects an offer.

What are the steps in a short sale for buyers?

1. Find preforeclosures: You can search online listings for preforeclosed properties, or you can get help from a real estate professional who specializes in short sales.
2. Look at the home and do research: Finding comparable homes can help you gauge the property’s worth when you view it. A real estate professional can also help you find out about any liens or other encumbrances on the property.
3. Figure out your financing: Consider meeting with the home’s existing lender about financing your mortgage. The lender will give you a short sale application, and because they’re familiar with the property, they may be able to expedite the process.
4. Submit the short sale application: Complete and submit the short sale application with an offer. The lender’s short sale process can take anywhere from a few weeks to a few months.
5. Negotiate the terms and seal the deal: The lender may negotiate on the sale price before accepting an offer and closing the sale.

Pros and Cons of Short Sales

When you’re deciding whether to purchase a short sale or a foreclosure, it’s important to understand the pros and cons of each option. Buying a short sale property has its upsides, but there are some downsides, too.

How Foreclosures Sales Work for Buyers

Foreclosure sales can come with significant savings – but they aren’t without their risks.

When a homeowner gets foreclosed on, the lender becomes the owner and, by default, the seller. With foreclosures, there are only two parties involved: the buyer and the lender.

Some foreclosed properties are sold at auction while others get listed on the multiple listing service (MLS) for sale.

How much can you save by buying a foreclosed home? A recent study from Auction.com found that while foreclosure sale prices are at an 8-year high, foreclosed homes are still selling for an average of 67.7% below the property’s estimated market value.^[1]

Foreclosure auction

Buying a foreclosure property at an auction is where you’re likely to find the best deal, but it’s also where you could face more risk because the homes sold at auction are usually sold as-is.

Auctioned foreclosures are usually sold sight unseen. The bank provides very little information on the property and may only have a few pictures, so you must do your due diligence before bidding.

You could score a great deal on a wonderful investment opportunity or squander your life savings on a condemned home. If you’re not comfortable with this level of risk, you may want to consider another option.

Foreclosures on the MLS

Looking for foreclosures on the MLS will feel more like the traditional approach to home buying. The listing will include relevant information about the property, such as square footage, number of bedrooms and bathrooms and any recent updates or repairs made to the property.

One of the main advantages of pursuing foreclosures on the MLS is that you’ll get a chance to tour the property before you make an offer. That’s not always an option with foreclosure auctions.

Now, given the current real estate market, you can count on more people considering foreclosures. And that likely means you can count on more competition for foreclosed homes.

Pros and Cons of Buying a Foreclosure

Now that we understand what a foreclosure is, let’s take a look at the pros and cons of this type of home purchase.

Where Can I Find Short Sale and Foreclosed Properties?

There are a couple of different ways you can find short sale and foreclosed properties. Start by looking for a real estate agent who has experience with these types of properties. There are also a couple of online sources with these listings.

Fannie Mae HomePath®

HomePath® is a popular website that provides listings of foreclosures and short sales. Enter a property address or MLS number you’d like to search. Plug in a city or zip code, and you’ll gain access to Fannie Mae properties in your selected area for sale. In addition to listings, the website offers helpful resources for prospective home buyers.

Freddie Mac HomeSteps® 

You can use HomeSteps® to help you find foreclosures and helpful home buyer resources. The inventory isn’t quite as large as the inventory on the HomePath® website, and Freddie Mac tends to have more rural properties.

RealtyTrac

RealtyTrac is a paid resource that lists foreclosures and short sales. Besides listings, there are tools and resources to help buyers who are interested in distressed properties.

Which Is Better? The Short Answer: It Depends

When deciding between a foreclosure or short sale purchase, it’s important to understand each option’s benefits and drawbacks. Both options open up more opportunities for buyers, which is especially helpful when inventory is low.

Whether you choose a short sale or a foreclosure, make sure your decision aligns with your personal preferences, needs, goals and circumstances. Do your research, be patient and stay flexible.