Should I Buy Short Sales or Foreclosures?

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:

• Who owns the property
• How far along it is in default

There is a significant difference between buying a short sale vs. buying a foreclosure. Some great deals are available either way, sometimes as much as 50% off the peak value of the home, but you need to understand a little about how the system works in order to decide which is right for you.

Buying a Short Sale

Buying a short sale means making an offer to the owner, who is the one listing the home for sale, then submitting that offer to the owner's bank for their approval. Since they are the ones being asked to take a loss on the loan (actually, they may take less than the amount owed and still make a profit, but that is a topic for another article), they essentially need to tell the owner "yes, we'll accept this offer."

This is where the deal can get tough. Let's say you've found the perfect piece of Cincinnati real estate, but it's a short sale. You make an offer, and the owner accepts your offer. His agent then submits your offer to the owner's bank, who sends it to a short sale negotiator who represents the bank's interests. This negotiator is often an hourly employee who has no stake in seeing the deal go through.

It is not uncommon for short sales to take from two to 12 months to complete. Months can go by without hearing from the bank at all, and if the owner's agent is not good at calling the right person in the bureaucracy, the offer can languish with no action until your patience is worn out and you move on to another home.

On the other hand, if the selling agent is familiar with short sales enough to know who to call at the bank and when, the process can go fairly smoothly. I recently made an offer on a home in November 2010, and it closed escrow in late February, so deals can get done. Just be prepared for delays and some extra work on the part of the agents.

Buying a Foreclosure

Buying a foreclosure is usually a much easier process than buying a short sale. That doesn't mean you should ignore homes for sale that are short sales; if you find your dream home and it is a short sale, it may be better to accept the challenges of that type of transaction.

However, all things being equal, a foreclosure will be much easier to buy for the following reasons:

• The bank already owns the property and does not want to. In a short sale, they don't yet own it, and are hoping the owner will just keep making their payments.
• The bank is incentivized to ignore short sale offers, because the government offers the banks subsidies for foreclosed homes that are not available to short sale homes.
• While a short sale negotiator is typically an hourly employee with no direct stake in getting the deal closed, a listing broker for a foreclosed property does get a commission. They therefore have an incentive to see the deal through to the end.
• The price is usually discounted aggressively to sell. Although it may seem like it lately, banks aren't in the business of owning real estate, they just want to make a loan using the home as collateral.
• Since there are fewer bureaucratic decision-makers involved, the process can often take as little as three weeks from offer to closing.

Making a decision on whether to buy foreclosures or short sales comes down to analyzing what's important to you. Foreclosures will generally be easier to buy than short sales, but limiting yourself to foreclosures may mean you are overlooking your dream home if it's a short sale. After searching for Idaho real estate that matched our family's needs, we ended up finding our dream home, but it was a short sale. If having a quick and easy experience is your priority, buying foreclosures may be the best move for you.