What Are The Different Types Of Home Purchases?
Ok, so you’re thinking about buying a home, and I’m sure you have heard lots about the current real estate market having everything from short sales to foreclosures, but do you know the differences?
One of the biggest issues in today’s market is the amount of mis-information people can get regarding the different types of purchase transactions, and how they affect the process of buying and selling. This guide will explain those differences and what you can expect when you embark on any one of the particular transactions.
The traditional sale is simple. It is the owner(s) of the property deciding to list the home for sale. There are typically no concerns about the seller being underwater on their mortgage, and in most cases once a contract is in place, the sale of the home can take anywhere from several weeks to 45 days, depending on the financing conditions.
In this type of transaction, the majority of sales are from individual sellers or families, while some come from bank-owned (post foreclosure), corporations (investors selling a fix and flip), or things like estates. These transactions are typically the easiest and most straight-forward.
By definition, a foreclosure is the legal proceeding that bars or extinguishes a mortgagor’s (debtor’s) equity of redemption in a mortgaged real property.
Basically what that means is a foreclosure is the process of a bank or lender taking action against a homeowner who has defaulted (not paid) on their mortgage. Since the mortgage lender supplied the loan on the property originally, they have a vested security interest in the property and are able to file a 1st lien on the property. This essentially allows them to have legal ownership rights in the property until the mortgage is fully satisfied.
In the foreclosure process, the debtor files a legal foreclosure proceeding to pursue these rights, which usually includes eventually evicting the homeowner from the house. Typically, mortgage holders do not begin a foreclosure process until around 3 months of non-payment, and in today’s market it can take even longer if that particular lender is willing to work with the homeowner through multiple avenues (payment extensions, refinancing, partial payments, etc…).
If the foreclosure proceeding is going through and no viable solution can be worked between the homeowner and lender, documents are filed with the state in order to proceed with eviction of the owners. First, a Notice of Default is filed through the county recording office. This gives notice to the homeowner that the foreclosure process has begun, and gives them a “redemption/reinstatement period” to maintain ownership and stay in the home. Typically, the homeowner has until roughly a week prior to home auction to complete this process.
If the default isn’t corrected and the loan not brought current, the lender will continue on with the foreclosure process, which includes evicting the homeowner and then deciding what to do with the property.
Many foreclosures end up going into a foreclosure auction (HUD Auction), at which time the home is purchased (usually at great discount) and the debt to the lender is paid. Many cases end up seeing the lender not get the full amount of what is owed, and they end up taking a loss.
In other cases, the lender may decide to hold onto the property, sometimes making improvements, and then try and list the property for sale outside of auction. This can be risky for the bank, because they have now become property managers on the home, but it can be worth it to them if they know a normal sale will net them more than an auction price.
Short sales are generally the most complicated and most confusing types of purchases to prospective buyers and consumers. Short sales can take anywhere from a traditional sale timeframe to months and even years to close!! A short sale occurs when a homeowner is not necessarily going to go into foreclosure, but they want to move from their home, and due to one or more reasons they are upside-down on their mortgage.
This usually happens when values in an area drop after the purchase is made, but can come from other things like missed payments, loss of job, etc…
The way a short sale works is a seller decides to sell their home (just like a traditional sale) and hires a Realtor® to list the home. The difference here is that the seller already knows that when they sell the house, they will not have enough money to pay off the lender from the proceeds of the sale. Where this gets complicated is in the fact that the seller now needs to get approval from the bank to take a loss on the loan they made.
In some cases, the short sale Realtor® will work with the bank or lender before listing to get an approved short sale price, which can ease the process tremendously. However, most short sales get hung up because the seller decides to offer the home for a certain price, then accept a purchase offer, and finally take that offer to the lender to try and get that price approved by the lender, who sometimes is not willing to take a loss that is being proposed.
There are other factors that can also greatly delay a short sale process; one is when you bring more than one lien holder into the picture. Here is an example of a short sale situation:
Joe Smith owns 1234 Smith Rd, and purchased it with a loan from ABC Bank for $200,000. ABC Bank files a 1st lien on the property for the amount of the mortgage ($200,000). Two years later, Joe takes out a home equity loan for $20,000 from XYZ Bank. XYZ Bank now puts a 2nd (also known as a junior) lien on the property.
In the following two years, the property value of Joe’s house drops to $150,000. Meanwhile, Joe still owes ABC bank $180,000 and XYZ Bank $10,000. Joe now wants to move to another city to get a different job.
Now, Joe faces a huge problem. His house will only sell for $150,000, but he owes $190,000 combined to two different banks, and it would take him 5 to 10 years to pay off the difference, but he is not willing to wait it out and not follow his career dreams!
So Joe decides to move forward with a short sale, puts the house on the market, and receives a purchase offer for the full $150,000 he was asking.
Joe’s Realtor® takes this offer to the lender, ABC Bank, who despite taking a loss, agrees to sell the property at that price. However, in order for full title transfer to be possible to the new owner, all current lienholders must be satisfied and agree to the short sale. In this case, XYZ is not happy about taking a potential $10,000 loss, and decides not to agree with the short sale unless ABC Bank agrees to pay them the $10,000 they are owed.
ABC Bank does not want to take a $30,000 loss PLUS pay XYZ bank another $10,000 to satisfy their lien, and we arrive at a stalemate.
The two banks can haggle with each other for months until reaching a settlement or a non-agreement, all the while Joe is still stuck at the property and the prospective buyers grow anxious and weary of making the purchase altogether, and are also stuck waiting for an agreement before anyone can move forward with the transaction.
While this case might seem extreme, it is a very common theme in the short sale market, and very realistic of what happens to people involved in these types of transactions. For many people, they can make a purchase that ends up being a great deal, but you have to be willing to wait and expect to have issues arise during the process.
The short sale process isn’t for everyone, but for those with pre-approved short sale prices affixed to the listing, it can make it a lot easier.