In the search for the ideal home at a reasonable price, many buyers consider making an offer on a property that is up for short sale or foreclosure. While these options offer the potential for impressive bargains and lucrative investment opportunities, they are often rife with pitfalls that could end up causing buyers to incur undue stress and expense. When considering purchasing a short sale or foreclosure, knowledge and preparation are the keys to avoiding disappointing and costly consequences.
For starters, it is important to distinguish between a short sale and a foreclosure. A short sale occurs when the fair market value of a property is less than the amount that the owner owes. The home still belongs to the owner, but the owner will not be reaping any profits from the sale—and a short sale may be the last step before foreclosure. On the other hand, a foreclosure is a home that is now owned by the bank, which foreclosed on the mortgage loan because the homeowner stopped making payments.
Regardless of whether you are thinking about buying a short sale or a foreclosure, here are some tips to help you navigate the process:
- Avoid getting attached to a property. There is a strong chance that your offer will be ignored or rejected, so resist the temptation to fall in love with a property that is being sold under these circumstances. Continue looking at other homes and try to forget the one you made an offer on—unless and until you hear that the bank has accepted your offer.
- Be prepared for a long wait-but also be ready to buy. Short sales and foreclosures require all stakeholders to do their due diligence, which could potentially take several months. Resist the urge to pester your realtor about whether he or she has received any news on your offer, and accept that you might never get a definitive answer. At the same time, your offer could be accepted quickly, so you should be financially, logistically, and emotionally ready to proceed with the purchase.
- Know that you may have to make substantial improvements to the home. When homeowners realize that they will have to short sell or foreclose on their homes, they often begin neglecting the property because they know that they will not make any money on the sale. Furthermore, many short sales and foreclosures are sold “as is”—meaning that as the buyer, you will be responsible for any repairs that need to be made. If you are making an offer on one of these properties, it may be a good idea to have money set aside for clean-up, repairs, and improvements.
- Be particularly cautious about foreclosure auctions. When a property is up for auction, bidders typically do not have the chance to inspect it or receive much information about it. As a result, even experienced buyers may fall victim to costly pitfalls, such as outstanding liens on the property, extensive damage, or even a previous owner who refuses to move out. In addition, if you are not a seasoned buyer, know that at an auction, you will likely be competing against people who purchase and “flip” foreclosures for a living.