Buying a Home Sold through Short Sale or Foreclosure

If you are planning to buy a home and want to get a good deal (and who doesn’t?) you may have considered purchasing one sold through short sale or foreclosure. Often, a home sold one of these ways will cost less than a comparable home sold the old-fashioned way, but both can present unique challenges you should be aware of before deciding to go this route.

Short Sale
Under a short sale, the property is sold for less than the amount owed on the mortgage. This type of sale is often used by homeowners who cannot pay their mortgage and want to avoid foreclosure but are unable to sell their house for at least the mortgage balance.

The first part of the short-sale process works the same as for a regular sale – you submit an offer to the seller, who can accept, counter or reject it. Many sellers will accept virtually any offer that comes their way since they are eager to avoid foreclosure (although bidding wars can sometimes break out if several buyers are interested in the home). Next, the offer must be approved by the seller’s lender(s). If the seller has a first and second mortgage, both lenders must approve the offer. When deciding whether to accept or deny a short sale request, the lender typically considers the seller’s financial situation and what the market value of the home is. They may also require you, the buyer, to be pre-approved for a mortgage. It can take lenders weeks or even months to respond to an offer. (It is usually a good idea for you to continue looking at houses in the meantime.) And in the end, there is no guarantee that the lender will say yes. Some may see a short sale as a good solution to a bad situation. Others may not feel it is in their best interest to agree to it.

If the lender signs off on the deal, it is smooth sailing from here on out, right? Not always. Keep in mind that the deal is not final until the ink is signed on the closing papers and the property is transferred into your name. It is not unheard of for a lender to cancel a short sale at the last minute because the seller has come up with the means to pay the mortgage or they decided they would rather offer the seller a loan modification. Also be aware that you will likely be purchasing the property as is. Lenders generally do not like to fork out cash for home repairs, and the seller probably won’t have any money to pay them. However, you can still put a home inspection contingency in the offer and cancel the deal if you don’t like what the inspection reveals.

When buying a home sold through short sale, it is extremely important to have patience. Using a real estate agent that has experience dealing with short sales and selecting a home where the seller already has permission to do a short sale from the lender can quicken the process, but you should be prepared to wait six months or more until you can rent a moving truck. Of course, it may take less time, but if you need to be in the home a month from now, you probably don’t want to take your chances on a short sale.

Foreclosure
When a homeowner stops paying the mortgage, he or she is removed as the owner of the home through the legal process known as foreclosure. After the delinquent homeowner receives notification and is given a chance to pay, the home is typically sold at a foreclosure auction. You can attend a foreclosure auction and bid on a home, but it usually is not a good idea unless you are a very experienced buyer. You may not be able to view the house or have it inspected before the auction, and you cannot cancel the deal afterward if the home is not in good condition. Additionally, if the home has a lien on it, you may inherit it (depending on the type of lien). Many auctions are cash-only (meaning you have to pay the bid immediately with cash or a cashier’s check). At the very least, you generally will have to make a cash deposit and have pre-approval for a mortgage.

If there are no other bidders at the foreclosure auction, the house reverts back to the lender, who will most likely try to sell it. Buying a bank-owned home (also called Real Estate Owned, or REO) is less risky than buying a home at auction, and you can still usually get a great deal. Because the seller is an institution, it can sometimes take longer for them to respond to your offer and be ready for closing than if you purchase a home from an individual seller. However, the process is often quicker than if you go the short-sale route, and it can be helpful to use a real estate agent that has experience with REO properties.

You can (and should) include a home inspection contingency as part of the offer, but the lender may not be willing to do any repairs themselves before closing. (Unfortunately, due to a lack of maintenance, foreclosed homes are frequently in poor condition.) Also keep in mind that lenders typically know little or nothing about the home’s history and may be exempt from state disclosure laws (which dictate what facts about the home have to be disclosed to the buyer). For example, homeowner Joe Smith may be required to tell you the home’s basement often floods in the spring, but if ABC Bank took the home back through foreclosure, they would not have to.