Recent reports show an uptick in short sales and foreclosures in Central Florida. A client called me this week to see a foreclosure on the market. That is the first time in a long time that’s happened. I remember hearing about increases in foreclosures and short sales before The Great Recession. At the peak in 2010, nearly a million and a half homes were sold this way. I define the terms short sale and foreclosure, and explain how distressed homes impact the market in Central Florida.
Short Sale
A short sale is when a homeowner sells their house for less than what they owe on the mortgage. The bank approves an amount that doesn’t pay off the mortgage. Before the house goes on the market, the owner goes through the lender’s short sale approval process. Often a difficult process with lots of paperwork, a short sale takes a long time. Sometimes, lenders limit the time to go under contract and sell the house.
Once the lender approves the short sale, the house goes active on the market. In my experience, agents price these sales well below market value to generate interest. If you make an offer on a short sale, expect the lender to negotiate a price higher than your offer. Expect negotiation back and forth with the lender, additional paperwork, and a long closing schedule. Interestingly, Lakeland, FL is a nationwide hotspot for short sales right now.
Foreclosure
A foreclosure is the process a lender starts when a homeowner stops making payments. A lender usually starts foreclosure 90 to 120 days after the homeowner stops paying the mortgage. The lender calls the homeowner during that time to modify the loan or offer forbearance (temporarily suspending the payments). At some point, the lender begins legal proceedings; some steps happen after filing a “lis pendens” (Latin for “suit pending”) in public record. It’s important to note that homeowners do have the opportunity to catch up on their payments during the process.
If modifications can be made, the lender takes ownership of the home to sell it. These types of assets owned by a lender are called REO (Real Estate Owned), and you may see this term on home listings. Although there are good deals out there on foreclosures, in my experience, they, like short sales, usually end up selling for what they would if the property were just a normal sale. Interestingly, Florida leads the nation in foreclosures.
What do more short sales and foreclosures mean for buyers?
If you’re a buyer, expect the transaction to take longer – way longer. The lender won’t accept your offer right away. Many distressed properties’ listing price is lower than market value; you may compete against other buyers attracted to a lower price. You may end up paying more than your original offer. Often, foreclosed properties require repairs or updating. The owners of the foreclosure and short sale homes’ bad financial situation means they don’t have money for necessary repairs to critical items like a/c and roofs. These homes are absolutely as-is. The lender will not make any repairs. Keep in mind, the lender is trying to recover their losses.
In this sort of transaction, I recommend using an agent with some experience in this area. It requires consistent communication with the lender’s asset manager. Asset managers often work from a different state and don’t know the market in any particular area. Part of an agent’s job is to educate them on local market conditions. Short sales and foreclosures can be a daunting process that requires diligence from everyone involved in the transaction.
Having said all this, Florida may have some unique opportunities. According to Realtor.com, foreclosures sell for 27.2% less than their estimated value, and Orlando is one of the cities with higher rates of homes on the market in foreclosure.
