Tim Cranch wearing blue shirt

Tim Cranch

Ellie Penaranda

Foreclosures vs. Short Sales

Approximately 15% of homes listed for sale in the Naples area are either foreclosures or short sales (short sales are when the value of the property is less than the mortgage amount owed to the lender). Foreclosed properties exist throughout the Naples area, but are concentrated mostly in workforce communities such as Golden Gate City and Golden Gates Estates, which account for one-third of the foreclosures.

Foreclosures in desirable second-home communities appear sporadically, and if priced at foreclosed values, can turn out to be a really good buy. They do not last long.

Foreclosures are Sold “As-Is”

If you are thinking of a second-home purchase, and want to focus on foreclosures in a desirable Naples second-home community, then your choices will be few and you better bring along your hammer, nails, paintbrush, and work crews. Appliances have usually been stripped out by the foreclosed owner, along with any fixtures of value.

Short Sale-Foreclosure

Foreclosures are usually in disrepair, they are owned by the “bank.” “Mr. Bank” has never stepped in the property or looked at it. All the bank knows is that they are stuck with it. The properties are sold in “AS-IS” condition, meaning repairs that would typically be the responsibility of the seller will not be made. The buyer is accepting the property in its as-is condition. The buyer still has the right to inspect the property, and can cancel the agreement within a certain time frame if the extent of discovered repairs are over and above what was anticipated.

If you have the time and sweat equity to bring a foreclosure back to good order, then purchasing a foreclosure could be a very good value. In some cases a foreclosed property can be in very good condition, particularly recently built properties purchased by investors at peak pricing.

Short Sales

A short sale is when the home’s value is less than the mortgage amount due a lender and the lender has agreed to accept less for payoff of the existing loan amount. The lender is not involved with picking the listing agent, setting the list price, paying expenses or anything else; but the lender must approve the sale, that is the extent of their involvement. Industry experts estimate that only 15% of short sales actually sell, the rest end up in foreclosure.

With short sales the seller does not care what the property is listed at, because at closing they get nothing back. Let’s say, for example, a property’s value is $400,000, the seller and agent could list it for $400,000, $300,000 or $200,000.

If, for example, it is listed at $200,000 and an offer comes in for $200,000 it is then sent to the lender for their approval. Before the lender responds (accepts or rejects the offer), the lender will order two appraisals of the property. If the property appraises at $400,000, then the lender will only accept an offer in the $400,000 price neighborhood. This process usually takes four to six weeks, and during that time the agent will continue to submit other offers that come in on the property.

So in this example a buyer puts an offer in at $200,000, the full list price, hoping to purchase, and then finds out four to six weeks later that the lender wants $400,000.  In the meantime, several other properties the buyer had interest in, in the $200,000 price range, have been sold and are no longer available and the buyer has had their deposit tied up in escrow.

The exception is when the short sale is listed at a bank pre-approved price. In other words, the four- to six-week process has already occurred with a previous offer that was turned down, so the bank then knows what it is willing to accept. If a buyer submits an offer less than the bank approved list price, then there is usually a lengthy wait for any type of response – which usually will be NO.

With a short sale, neither the seller or the listing agent cares what the property sells for, just that it sells. If it sells in a short sale then the seller avoids foreclosure, and does not get their credit score dinged. If it forecloses, then the bank picks its own listing agent to get it sold, and the original seller’s listing agent get no compensation for their efforts.

Foreclosure vs. Short Sale

 ForeclosureShort Sale
Who owns the propertyBank                    Seller
Who selects the agentBank   Seller
Who selects the list priceBankAgent/Seller
Who maintains the property          Bank Seller or Nobody
Who is paying utilitiesBankSeller or Nobody
Who pays back fees & taxesBank Buyer
Response time QuickDelayed or Never
Likelihood of sellingHigh    Low

If a buyer is not willing to wait at least four weeks to hear back on an offer, then there is no sense in submitting an offer on a short sale. Once again, the bank does not own the property, but must approve the offer that gives them less than what is owed.

This concept is difficult to understand for most buyers. Because it does not fit the procedure that most buyers are accustomed to. That is, an offer is submitted to the seller who had set the list price, as an indication of what they would accept for a sale. And good-faith negotiations occur based on that list price.

With a short sale, the list price is meaningless, as the list price on a short sale has not been set by the party that must approve the offer – the lender. So an offer needs to be submitted based on a reasonable assessment of the property’s true value, regardless of the list price.

I am available to represent you as my buyer client to locate “pre-approved price” on short sale (which are few and far between) and/or foreclosures that are in good condition (which are usually snapped up by other buyers & their agents within a week or two from hitting the market).

Please call me at 239-776-5077 to discuss what services I offer to my buyer clients who are only interested in Short Sale or Foreclosed properties.