Short Sale vs. Foreclosure: What's the Difference?
You may have heard that you can get a good deal by buying foreclosures or short sale properties. However, you may not know exactly what that means. In this article, we explore the differences between short sales and foreclosures and why investors would want to include them in their property portfolios.
What Is a Foreclosure?
After a homeowner stops paying their mortgage, the mortgage lender takes the property as collateral. Foreclosures are less complicated and don’t take as long to buy as short sales. Lenders have specific laws to follow that vary by state. For instance, they have to allow the owner to pay back mortgage payments.
You can often find foreclosures at a sheriff’s auction. Properties that don’t sell at auction go back to the lender, which typically sells it cheaply as real estate owned (REO) property.
What Is a Short Sale?
Short sales are voluntary and represent an agreement between a homeowner that cannot pay their mortgage and the mortgage lender. Typically, the owner has to sell the property for less than they owe on their mortgage. In return, the lender agrees not to come after the borrower.
Why an Investor Might Buy a Short Sale or Foreclosure
Following tough economic times such as the pandemic in 2020, many homes fall into foreclosure, giving wholesale investors a unique opportunity to buy properties cheaply and turn them around without making improvements. Even distressed properties can net a hefty return on investment when rolled over quickly with a new, higher sale price.
Short sales are typically in better shape than foreclosures because most property owners remain on the property prior to the sale. Foreclosures may sit vacant for numerous months, and short sales sell more slowly. However, both investment types have risks and rewards to consider.