You can't get away from it: everywhere you go people are talking about foreclosures, their effect on the housing market and what a great deal you can get.  Here are some definitions, myths and facts about buying short sales or foreclosures.

Short Sale: When a seller is trying to sell their house to stop foreclosure but they owe more than the house is worth.  The seller negotiates a lower payoff amount with their lender in order to sell the property and transfer title to the buyer with no liens.

Myth: You are buying the house from the bank.

Truth: The seller still owns the property, and you (the buyer) are still negotiating and dealing with the seller.  The bank has influence on the decisions the seller makes, but does not make decisions for them.


Myth: Since you are buying the house from a seller, not a bank, the transaction proceeds normally.

Fact:  There are two major differences in a short sale transaction.  The first is time.  The "short" in short sale does not refer to the length of time it takes to process the transaction.  Short sales can take weeks or months to get approval of the reduced payoff from the bank.  No one can give you a length of time or a date that you will receive an answer.  It all depends on the bank, the offer, how close the seller is to foreclosure, how well-staffed the bank is and many other variables.  Patience is the key when purchasing a short sale.  If you need to be in a house by a specific date, a short sale is not for you.
The other major difference is repairs.  Most, if not all, short sales are "as-is."  The seller obviously doesn't have the ability to pay the mortgage, and it is fair to assume they will not have the ability to pay for repairs, either.  Occasionally you may be able to receive a contribution towards your closing costs or a price reduction to offset repairs, but usually not.  Once the bank approves the reduced payoff, any changes to that amount will start the process all over again.


Myth: You can buy a short sale for pennies on the dollar.

Truth: Yes, you can get a good deal on a short sale but the bank must approve the payoff.  The bank will usually send an appraiser or order a BPO (Broker Price Opinion) to determine fair market value and will establish what amount they are willing to accept.  This amount is typically less than fair market value, but rarely less than about 90% of value.  If the bank feels they can sell the house for more themselves, they will not approve the short sale and allow the property to foreclose.


Foreclosure:  When the mortgage company has repossesed the property.

Myth: You buy foreclosed properties at auction.

Fact: The first opportunity to buy a foreclosure is at auction.  This typically happens on the courthouse steps or in an attorney's office.  The two important things to remember about foreclosure auctions are: 1) you must have a deposit in the form of a cashier's check to participate in the auction and have 24 hours to pay the balance in certified funds and 2) you have no opportunity to view or inspect the property prior to purchasing it.  Because of these two factors, you cannot obtain a traditional mortgage on an auctioned property because mortgage companies usually need a minimum of 2 weeks to process the loan and must be able to send an appraiser to the property.  You can sometimes obtain hard-money loans as interim financing, but these types of loans can be very expensive and risky.
The second opportunity to buy a foreclosure is after the auction.  The bank will usually place a credit bid at auction, which is a bid for the amount of the loans.  If no one bids higher than the credit bid, the bank will take it back and place it on the market with a real estate agent at or below market value. This is where most buyers will have the opportunity to purchase a foreclosure.  Keep reading for more on this.


Myth: You can buy a foreclosure for pennies on the dollar.

Truth: Yes, you can get a good deal on a foreclosure, but the bank is trying to recoup as much money as possible from their investment.  They will rely on the expertise of an appraiser or real estate agent to determine the highest and best price the can get for the property in the shortest time possible.


Myth: Since banks want to get rid of properties as quickly as possible, you can close quickly on a foreclosure.

Fact:  While you can typically get a foreclosure quicker than you can a short sale, it still takes a bit longer than a normal transaction.  This is because the banks work under corporate policies and procedures that take time to process various steps in the process.  Getting a simple signaure that would ordinarily take no more than a day with an ordinary seller can take weeks to get from a corporation.  Some banks are better and quicker than others, but you should be prepared for an additional 2-4 weeks (45-60 days total) to close on a foreclosure.


Myth: Banks are desperate to get rid of properties, so you can make demands.

Fact:  Foreclosures are "as-is" sales in the strictest sense of the word.  You do not get typical property warranties on the condition of the property, you will not receive a seller's disclosure (since the bank does not know anything about the property), you will not receive the highest and best deed available (you receive a special warranty vs. general warranty deed) and most banks will make you sign their addendums which remove many rights you have to pursue them in court.  You also have a shortened or reduced inspection period and fewer contingencies than an ordinary transaction.  Usually banks will agree to a financing contingency, but this may also have a time limit on it.  In short, it's the bank's way "or the highway."



All of this information may seem scary, but with an agent on your side and a lot of patience, these difficult transactions can be navigated.  If you have additional questions, please feel free to contact me and I would be happy to answer them or schedule a consultation with you. 






The information in this article is for information purposes only and deemed reliable but not guaranteed.  This information may not apply to your circumstances or area and is not intended to constitute legal, tax or other professional advice.