Buying a short sale vs. a foreclosure

When you are considering buying a home, it pays to do a little research on how to get the best prices. It won’t take more than a few seconds of research to learn that buying short sales and foreclosures can be a valuable strategy to get more home for less money. So what is the difference?

The difference between a short sale and a foreclosure in a nutshell is:

  1. Who owns the property?
  2. How far along it is in default?

A home that is on the market as a short sale is still under the control of the owner, who is attempting to sell the home for less than the amount of the loan balance.

So let’s say the buyer owes $350,000, but the market price for a similar home in his neighborhood (called a “comparable”) is around $200,000. There is no way to sell the home at market value without the bank taking a loss on the loan. This is why it’s called a “short sale”–because it is being sold for a sum that is “short” of the total amount owed. It is a “pre-foreclosure” property because it has not yet been foreclosed by the bank.

A foreclosure, on the other hand, is a property that has already been repossessed by the bank. Also called “bank owned” or “real estate owned” (REO), when you buy a foreclosure, you are negotiating with a bank, not a private party.

Which should you buy?

It depends largely on how fast you’d like to close escrow and how many obstacles and uncertainties you’re willing to bear in the process. A short sale generally takes longer to close a deal, because of the process of negotiating with the bank. Remember, they haven’t agreed to do a short sale in most cases unless it’s been preapproved as a short sale. They are being approached by the owner and asked to take less than the full loan amount, and that decision takes for the decision makers at an institution like a bank to make.

Already-foreclosed homes, on the other hand, can move a lot faster, simply because the home is free from legal encumbrances. There are no owner/occupants to deal with, just the lending institution (that’s why bank owned homes are also called REO’s or Real Estate Owned).

If you find your dream home and it’s a short sale, you may be willing to abide the extra inconveniences of doing this type of transaction. If you are in the mood for speed and efficiency, stick with non-short sale homes and REOs.

Want to look at short sales or foreclosures?

We can help you find a great deal, whether it’s listed as a short sale or is already bank-owned.

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