Understand the difference between a Pre-Foreclosure and a Short Sale
While some people use these terms interchangeably, they are in fact very different. A Short Sale is a listing that is dependent on the lender (often referred to as a “third party” or “mortgagee) approving the sale. This is necessary because the Seller NEEDS the lender to agree to release the mortgage and allow the transfer of the property even though the borrower defaulted on the loan. The “Short” in “Short Sale” refers to the fact that the Seller is short on the amount needed to repay the debt — the house is no longer worth as much as was loaned against it. If the lender does not agree to the price or terms then the deal is not going to work and the home will ultimately be foreclosed on if the seller can not modify the loan or bring the payments current. The list price is often a guess of market value by the list agent and is not to be regarded as an approved sale price unless otherwise specified.
A Pre-Foreclosure refers to a property that may be in default (behind on payments) but does not necessarily mean that it will be a short sale. The primary difference is equity– the value of the home is still more than the amount owed. In these cases, the seller may have equity in the home but, because of job loss or other unforeseen circumstances, they cannot continue to pay on the home and often look to sell it quickly for less profit just to walk away with something before the bank swoops in to take it.
Both can be a good deal but the pre-foreclosure may be more attractive to most with shorter wait times and more definitive terms.