Risky Business: Insider’s Tips for Buying a Foreclosed or Short Sale House

By Kandy Harris

Foreclosures, Bank Auctions and Short Sales! Oh My!

First, a crash course in what these terms mean may be in order. A foreclosure occurs when the home owner can no longer make mortgage payments, and the lending bank takes back the property in order to sell it and then recoup the remaining amount left on the mortgage loan. The property may then be sold on the market or auctioned off.

A short sale may take place when the remaining balance left on the mortgage is more than the house is worth (an “underwater” home), and the bank agrees to sell the home for enough to cover the mortgage, but not quite enough to cover all other associated costs, like closing costs, taxes, agent commissions, etc. Short sales can be an alternative to a traditional foreclosure, but one thing is for sure: Short sales are almost never short in duration. The bank will look at every offer and determine which one to accept. This process could take months, and the bank may still say no. However, if you can get past the wait, you could find yourself in the home of your dreams.

Tips from the Experts

Chris Modlin of Prudential Homesales in Lancaster, Pa. offers this piece of advice for those looking to buy a foreclosure or short sale: “Have a ton of patience and be prepared to expect the unexpected. The process can take six weeks or six months (or longer) because you are dealing with a third party often from a very large institution that has hundreds or thousands of these to deal with.”

Annie Rolfe of Ask Annie 1 st agreed with Chris. “One can get really good deals when buying a short sale, but all involved must have time and be patient. One must also realize that a mortgage company is being asked to accept less than what is owed on the balance of the property; therefore, the mortgage company will be trying to get the highest and best price for the property. If you are anxious, then short sales are not for you.”

Have we scared you with the thought of buying a short sale yet? If so, there are always foreclosed properties. Annie stated that “many foreclosures are in far better move-in ready condition than what was once the case.” However, many foreclosures also sell as-is. “These types of properties are excellent for investors looking to flip homes,” she continued. “These homes tend to sell a lot less, and the banks are a little more negotiable. Regular owner-occupied buyers tend not to be interested in these types of homes due to the amount of repairs needed. Owner-occupied buyers tend to look for move-in ready homes, and these homes are far from move-in ready.” If you’re considering flipping a foreclosed property, Annie explained that you will need to “be aware that when reselling these homes, many buyers will be obtaining financing which have seasoning guidelines to flipped properties, especially in resale value.”

Long story short, said Annie, do your homework. We knew that was coming, didn’t we?

“Get a pre-approval letter,” suggested Cher Castillo Freeman of SKY Real Estate in Washington, D.C. “It is wise to get the letter first, so that you know how much property you can buy and will be willing to take advantage of the opportunity when it presents itself.” According to Cher, a pre-approval letter will be particularly handy if you’re planning on bidding at an auction for the first time. “The novice will be going up against seasoned real estate professionals and developers that will have cash available to snap up bargains quickly and to then invest those additional funds to fully renovate the property.”

Furthermore, keep in mind that properties occasionally have more going on than meets the eye.  “Houses in auction may not have a clear title or may still have other liens, and delinquent taxes that must be settled prior to the title passing so funds also need to be available to address these issues,” Cher explained.  She also recommends finding a seasoned broker who knows the banks and has experience with short sales. Some even suggest that you should find a broker who’s handled at least 100 short sales. “Purchasing these types of properties can be lengthy and working with a skilled broker and lender can save you a lot of time and aggravation,” said Cher.

As for making a bid at an auction, it’s important to remember that what you see is what you get … and the condition of the house may be in worse condition than meets the eye. “You will typically only be able to inspect the outside of the property and will not be able to view the interior until after purchase,” cautioned Cher, “so there may be significant repair that is needed.”

Did We Mention Patience?

Every single expert repeated the same word again and again: patience. Short sales get rejected after months of waiting. Foreclosures get snapped up quickly, and bank auctions can be cut-throat. If these concepts make you sweat to the point of irritability, perhaps they aren’t for you. However, there can be big returns on your investment as long as you possess the ability to wait, and wait, and wait some more.

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