What’s the Difference?

What’s the difference between a Short Sale, Foreclosure and HUD Home?

Some time ago, we posted a series of articles on different terminology related to home purchases that can often create confusion.  This post covers three more – Short Sales, Foreclosures and HUD Homes.  The current housing market has more homes available that are not the traditional transaction.  Here are just three you may want to know about.

A Short Sale is a home that is being sold by the current owner where the selling price is less than the current balance owed on the mortgage.  Many times there are outlying factors that force a short sale, such as relocation for a job change or a homeowner who has fallen behind in payments and is trying to salvage some equity or avoid foreclosure.  The advantage of purchasing a home in short sale is that you can get the home for its true market value, and not an artificially inflated price. 

The primary disadvantage to purchasing a short sale home can be the time involved.  In many cases, the bank is unaware of the seller’s intentions to sell the home, therefore once the bank receives the offer they must spend a great deal of time investigating the details.  This process can take months.  Unless you have written a deadline to your offer being accepted, you could be locked into this transaction until it is either approved or denied by the bank.  In some cases, the bank can pre-approve a short sale, but keep it mind it has been approved for a specific price.  Any other offer must be resubmitted and approved by the bank.

A Foreclosure sale means that the bank has full possession of the home and is the seller you will be negotiating with.  A foreclosure purchase is most like a traditional home purchase out of these three examples.  The biggest advantage of foreclosure sales is that you are dealing with a seller who has no emotional ties to the property.  It is simply a matter of recovering as much of their money as possible.  The second advantage is that you can purchase a home at a value much below market value.  You are free to negotiate price and seller concessions, but keep in mind the bank has based the selling price on a recent appraisal done to determine value.  The final selling price boils down to how desperate the bank is to sell the property.  So while you can offer a lower price, don’t be insulting.

The disadvantage of foreclosure homes is that they generally require repairs before you can assume occupancy.  The seller (the bank) also has more control of the sales process and can back out for any reason, such as an amended contract with a condition they find unacceptable.  Start by writing a sales contract that you understand, protects your interest and with terms you can agree with.  By reading your contract carefully and in detail you can generally avoid most areas of contention.

A HUD Home is an FHA owned property where the home is made available to individual, owner occupied buyers for the first 10 days it is on the market.  After these initial 10 days, all bids are reviewed at one time.  If no offers are accepted investment buyers can then place bids on the property.  Again the advantage of these types of sales is the ability to get the home for a price under the typical market value. 

The biggest disadvantage to a HUD home is that the asking price is set at an “as is” appraised value.  Any bid for more than this amount must be paid in cash at close by the buyer.  If your sales price is higher than the asking price, you can only mortgage the asking price less your down payment.  Be prepared to move quickly if you have your eye on a HUD home; if the repairs are at a minimum these homes will move quickly.  Generally homes purchased by investors require significant improvements to bring them back to acceptable safety standards.

Don’t be afraid of these types of transactions, just do your homework and work with licensed professionals who have experience with these types of purchases.  They can help you navigate the process successfully.

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One Response to “What’s the Difference?”

  1. Delayed Friday Round-Up Says:

    […] Awareness Home Funding presents What’s the difference between a Short Sale, Foreclosure and Hud Home? […]

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