Short Sale vs. Foreclosure

After a lot of nudging from my staff, more specifically, my marketing manager, I have finally decided to write a blog about foreclosures in New Jersey. Much of my hesitation was- does anyone really want to hear what I have to say? Day in and day out, my staff listen to me speak to customers, clients, and peers about foreclosures. One day I was talking to a potential new client about onboarding their foreclosed properties and I realized… “Hey, I really do know a lot about foreclosures in New Jersey”. And so the next day, with my head hung low, I announced to my marketing manager that I wanted to start a blog. And here we are.

Where to start is really the next question. I put a lot of thought into this. The right place to start is where I get the most questions. One of the questions I hear if not weekly, sometimes daily is: what’s the difference between a foreclosure and short sale. I’ve heard so many untruths in my career it makes me shake my head sometimes.

Let me start with a little history first. The first short sale I did was back in 1998 for a local homeowner. She was a sweet lady and just didn’t have the ability to sell her home for what it was worth because she owed more than the market would bear. Back then, short sales were unheard of in our industry. The funny thing is they have existed since loaning money has been in play. Anytime you owe more than you can pay off, you are short. Only have we made it a household name when the mortgage industry almost collapsed in late 2007. While we sat there with our mouths open watching the drama unfold in 2008, the mortgage industry was forced to recognize the big picture in front of them. Thousands of Americans were upside down on their mortgages. Lenders had to very quickly become proficient at doing short sales. Some have, some are still scratching their heads.

One of the biggest differences between a foreclosure and a short sale is who owns the property. In a short sale situation, the homeowner still owns the property. They still have all the rights of ownership to that property. The only thing holding them up from selling is the amount owed on the property. And for that, they have to ask the lender to short the loan in order to allow the property to transfer title. A homeowner doesn’t have to be in default to be considered for a short sale. Although most are, it is not an absolute.

In New Jersey, our foreclosures are currently running about 400 days to process on average. There are a lot of reasons for a foreclosure to take much longer and in some cases, could be shorter. There are two differences when we talk about foreclosures. Are we talking about the foreclosure process or foreclosure as in, bank owned? The process a lender has to go through to take the property back is the “foreclosure process”. The public will use the word “foreclosure” as a generic name for a bank owned property. However, until the foreclosure process completes, the homeowner still owns the property and can utilize it however they wish, subject to any restrictions in their mortgage note/documents. Once the foreclosure process completes and the property goes back to the lender then we can call it a foreclosed property or REO (real estate owned).

If you just remember the ownership, you should be able to keep the terms straight. Just about every day a customer will call in asking if one of our REO’s is a short sale or foreclosure and then still not understand the process.

Short sales may take a bit longer, depending on who the lender is, primarily because they will have to review the financial aspects of the picture for that particular property. A lender will need to not only evaluate a homeowner’s financial picture, but they will also need to evaluate the current condition of the property and its value and then pass the whole picture off to the actual investor of the note for their review and approval. Other factors of consideration are how long the note has been out, how many payments have been made, etc. If the loan is insured, it adds another layer of approval to the short sale process. While lenders have gotten better at processing short sales since 2008, they still have stacks of files to evaluate. So in the end, the system is just merely bogged down by the process

Oscillating back to foreclosures, New Jersey is lagging behind much of the rest of the country right now primarily because we were under moratoriums for so long. While many of the other states processed through the plume of foreclosures years ago, New Jersey is just hitting its stride. We have a lot to get through and will be working on this for a few more years. In my opinion, one of the benefits of lagging behind is that the lenders made their mistakes in other states and have put processes into play to make corrections. NJ also put policy into place to protect her residents. The new procedures require the lenders to have additional certifications by the Judiciary Committee before they can get a sheriff sale date and move on to close out the process. Although I’m not going to get into the arduous process a lender has to go through to foreclose in NJ, keep in mind, it is a process for them. There can be complications in the foreclosure process which will cause delays.

I often get phone calls from neighbors that are upset about the neighboring vacant home. Unfortunately, there isn’t a lot that can be done other than to complain to the town if the yard is not kept. The homeowner is still responsible and the lender doesn’t own it to properly maintain it. They can, however, do minimal maintenance to protect the asset value by mowing the lawn and winterizing the interior.

I would like to think this clears up the short sale vs. foreclosure question but I know that you will likely have further questions. And that’s ok. Feel free to post your questions and I will answer them.