What Is the Difference Between a Short Sale and a Foreclosure Sale?

A real estate “short sale” occurs when the existing mortgage(s) on the property will exceed the proceeds from the sale. In this case, the lender allows the home to be sold at a loss and participates in part of that loss, thus the term “short sale.” Short sales are preferable to foreclosure proceedings because foreclosure exposes the lender to additional expenses such as litigation costs, carrying costs, real estate taxes, insurance payments, and the possibility of a loss on the eventual foreclosure sale. A short sale is also beneficial to the borrower, as long as the lender agrees to relieve the borrower from any liability for a deficiency between the amount of the loan and the sale price.
Purchasers in “short sales” may also receive a benefit due to a lower sales price and the desire of the lender/borrower to dispose of the property quickly. Purchasers need to be aware, however, that the lender will need to give final approval for any agreed sale price between the

borrower and prospective purchaser. Lenders will often require more stringent terms in short sale transactions. These terms often include: 30 day closing period, require cash purchase transaction, purchaser is responsible for all closings costs, and that the property is sold in “as is” condition. Although the purchaser is receiving a reduced sale price, these additional terms can amount to fairly costly out-of-pocket expenses that will not be reflected in the sale price.

In a foreclosure sale, the lender (“foreclosing mortgagee”) is entitled to bid at the sale just like any other bidder or interested third party. In this case, the lender will receive a credit up to the amount of the foreclosure final judgment entered in its favor. In some cases, the lender may bid at the foreclosure sale for the sole purpose of driving up the sale price and minimize losses. Typically, the lender will bid $100 and then allow competitive bidding between interested third parties. The successful

bidder at the foreclosure sale must provide the sheriff conducting the sale with a deposit in the amount of 10% of the successful bid in certified funds.

Within 10 days thereafter (upon the expiration of the right of redemption), but prior to the issuance of the sheriff’s deed, the successful purchaser must pay the remaining balance due on his or her bid. The successful purchaser must also make the payment in cash, certified check or cashier’s check. The successful bidder may also be required to pay interest from the date of the sale, but in no event, does interest run during the 10 day period after the sale within which the deed cannot be delivered.

Daniel J. Granatell is an Associate Attorney at WJ&L who has yet to fully specialize. He actively practices in the Corporate, Land Use, Real Estate, Tax, Trust & Estate and Litigation Departments.

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