Bombarded with terminology? Lately, the real estate industry has come up with some doozies: REO, foreclosure, short sale, upside down, pre-foreclosure, bank-owned, NODs, delinquencies…and more I can’t think of right now. Buyers and home owners are understandably confused by all the jargon. What’s all the lingo about anyhow?
Explaining chronologically, a short sale can only precede a foreclosure. A foreclosure is always the end of the line. Sometimes, home owners are unable to pay their mortgages for a variety of reasons: job loss, medical conditions or divorce or maybe just an unexpected jump in an adjustable loan. Sometimes the best way out of such a situation is to sell the house before the mortgage holder forecloses. But, selling a house costs money. There’s the big one, agent commisson at around 6% of the sale price, escrow, title insurance, home buyers warranty, termite, and, you get the picture–costs can run around 7% or more of the home’s value. Taking into account the current market value of the home plus the costs involved, many home owners today cannot sell without putting more money into the house which, being in financial distress, they don’t have. They come up SHORT.
So, the home owners, having missed several payments, try to negotiate with their mortgage holder. They ask the mortgage holder to accept less than the value of the mortgage in order to sell the house. That is why it’s called a short sale. The home owners have become delinquent ; such homes are known as delinquencies or, sometimes, preforeclosures. Home owners do this because they avoid the stigma of foreclosure and may save their credit scores. Mortgage holders avoid the expense of months of non-payment plus the foreclosure process.
These sales involve many, many complications a few of which I’ll go into here. First, banks often will not negotiate with the homeowner unless a real estate professional is involved, usually a real estate agent. The mortgage holders usually require the home owner to show real financial distress. Often, two or more loans are involved, from two or more different lending institutions. Criteria set by both mortgage lenders must be satisfied and frequently they don’t get along well. These complications are what make purchasing such properties so difficult and sometimes disappointing for the buyers.
Home owners these days, especially those who bought in the last couple of years, may find themselves upside down . That means their property is now worth less than they paid for it. Such homeowners sometimes try to sell thier properties as short sales , but lenders rarely allow it. Why not? Without true financial distress, the lenders see no reason why they should take the loss. After all, the homeowner is living in the home, not the lender.
Let’s say, though, a homeowner stops making payments for several months. What happens then? Usually, the mortgage holder or holders will start foreclosure, a legal process which in California takes 3 months and 21 days and begins with a Notice of Default [NOD] to the homeowner. Nothing having intervened to stop it, the home is foreclosed upon and sold, usually for the mortgage amount plus legal fees to the mortgage holder. At this point, the bank owns the property. Now it’s called bank-owned, lender-owned, or real-estate-owned [REO] or, simply a foreclosure.