Buying Short Sales vs. Foreclosures (REO Properties)

Why do buyers typically shop for short sales and foreclosure? Because they will find that as a rule, they can buy a lot more house for the money. But be sure you are working with qualified professionals to try and avoid unnecessary problems with property condition, inspections, and special contract addendums you see on many of these transactions.

First, what is the difference?

A short sale it still owned by the seller, and is being sold for less than amount needed to pay off the encumbrances on the property. The properties are being sold subject to lender approval. The more lenders are involved, the harder and more complicated the negotiations may become. You have to obtain a release from every lender in order to obtain title to the property, which means you could be dealing with the first mortgage holder, the second mortgage, and the holder of a home equity line of credit, as well as others.

On a foreclosure, the lender has already taken title to the property and is the current owner, and the other judgments will have been released in order for the title company to insure that you will be receiving a “clear” title to the property free of any encumbrances.

Property Condition

With many short sales, if the seller still resides in the home, the home will have been maintained in reasonably good condition, and you will find it much easier to complete the inspections you should do because utilities will still be available. If the seller has vacated the property, you will often find that the utilities are off and the property and landscaping are not being maintained. You will need to ascertain who is responsible for providing utilities for you to adequately complete all needed inspections to purchase the home. With a short sale, be prepared for the seller to tell you the money is not there for them to turn utilities on, and in some cases the utilities will have been disconnected for non-payment, which may in turn open a whole new set of issues to deal with.

You will find a wide range of issues on foreclosure properties. Some homes, the lender will be selling completely “as-is”. On others the lender will have spent the money necessary to bring the home back into show condition. Which is the better deal? They are all determined on case-by-case basis. There is no hard and fast rule.

Timing of the sale

The problem many buyers may experience with the typical short sale is that it may takes weeks for the lender to consider the contract and let the buyer know if they will accept the offer. You can get exceptional deals, but you may wait 6-8 weeks to find out the answer is “No”. If you need a place to live next week, that may not work too well. However, you will find short sales where the pay-off amount has already been negotiated and this may lead to a much quicker closing.

With foreclosures, the home has already been “processed” by the lender. It will have a “List Price” and they usually have a good idea as to amount they will actually accept if you offer less than the list price. Also, I have recently seen many buyers lose the home they bid because other buyers see the value and some are even offering more that list price for the home.