Buying a home that is a short sale or a foreclosure can save you money. But it also can turn out to be an expensive mistake if you don't shop carefully and get help from real estate professionals with experience negotiating these transactions. Here's some information about buying foreclosed properties or short sales.
Short Sale. In a short sale, the owner of the property is trying to sell it at a price that is less than he or she owes on the mortgage. Before the transaction can close, the seller's mortgage lender must agree to accept that amount. The difficulty is in the details. Not only must the first mortgage holder agree, but also second mortgage holders can delay or stop these transactions. That means the negotiations can be time consuming—taking several months in some states—and frustrating for a buyer who has little control over the process.
Foreclosure. In a foreclosure, the previous owner of the property has either given the keys back to the bank and abandoned the home, or the bank has taken back the property and forced the former owner to leave. In either case, the bank owns the property. Banks are often eager to find a qualified buyer and unload these properties, so the buyers of these properties often pay less than they would have if they had purchased a similar property in the same neighborhood that wasn't in foreclosure.
One good thing about a short sale is the presence of the owner who has a strong interest in selling the property for as much as possible. One big drawback to a short sale is that their name is a misnomer. Short sales usually take a long time to close. It isn't unusual for buyers to wait several months between signing the agreement of sale and going to the closing table.
Buying a foreclosure is simpler, but properties that have been through the foreclosure process may be in need of attention. Many of them may have sat vacant for months—even years—and could be damaged by weather and neglect.
Some foreclosures are purchased at auction. If that is how you decide to buy one, be aware that you may have to bid and even commit to the final purchase without having an opportunity to have the property inspected or the title thoroughly researched.
Whether you are buying a short sale or a foreclosure, the best way to protect yourself is to get help from knowledgeable title insurance and real estate professionals.
A real estate agent who has experience with either of these transactions can help you navigate the process.
A knowledgeable title insurance agent can help you avoid problems that can cost you down the road. Securing title insurance is especially important. Title insurance can help protect against defects in the title, including liens that weren't uncovered in the initial search and defects in documentation. These kinds of issues are, unfortunately, all too common in foreclosed and short sale properties.
There are two kinds of title insurance policies—lender's and owner's policies. Mortgage lenders always require that you buy a lender's title policy. Owner's policies are optional, but they are recommended for properties that have been through foreclosure. These policies will protect you. They pay court costs and attorney's fees if someone challenges your ownership or tries to collect on an unsatisfied lien arising from work done before you took ownership. If a claim is found to be valid, owner's insurance will cover your actual loss—up to the face amount of the policy.
While some short sales and even some foreclosures are in great shape, others are in need of extensive repair and remodeling. While you may get a very good price on these properties, before you decide to buy, make sure you consider all the factors, including the renovation costs. Even the best homeowner's insurance policy can't protect you from buyer's remorse.
If you do decide to buy a home, you will likely need to find a good insurance policy. Learn more about homeowners insurance in our Tools & Resources section.
Updated: September 2015