Purchasing a foreclosure or short sale property may mean finding a great house at a reduced price. But you should be aware that there are often challenges along the way.

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Purchasing a foreclosure or short sale property may mean finding a great house at a reduced price. But you should be aware that there are often challenges along the way.

Difference between a foreclosure and short sale

When a borrower consistently fails to make mortgage payments over a period of time, the property is foreclosed upon and the lender assumes ownership of the home. A foreclosed property may be sold at auction or through a traditional real estate agent.

While foreclosed properties typically are owned by banks, a short sale property is still owned by the borrower. In a short sale, the seller arranges with his lender to accept a price that’s less than the amount owed on the property. As part of this arrangement, the lender generally agrees to forgive the rest of the loan. Contradictory to its name, buying a short sale property usually takes a lot longer because it’s not just the buyer and the seller who have to agree to the sale. All the lenders that hold a lien on the property have to agree to the sale; if there’s a second mortgage on the property, that lender is also a lien holder.

To determine whether buying a foreclosure or short sale is right for you, consider these tips:

• Learn about the processes. Read everything you can about foreclosures, attend seminars and seek the advice of others with short sale- and foreclosure-buying experience. Learning the vernacular and understanding the basics of the process will better prepare you for the journey on which you are embarking.
• Get help from pros. If you’re thinking of purchasing a short sale or foreclosure, you’re going to need the guidance of a professional who has experience buying and selling these types of properties. Additionally, real estate agents who specialize in foreclosures often have long-term relationships with local lenders, so they’ll hear about properties that haven’t yet been officially listed. Foreclosure laws and regulations are tricky and they vary from state to state. A real estate agent can help you locate properties and make offers, but you cannot rely on him for legal advice. Be prepared to consult with a local real estate attorney who understands how these purchases work.
• Think about the future. Approach any real estate transaction with a long-term perspective. If your plan is to flip the property, make sure you can afford to carry the mortgage if it doesn’t sell right away. If you plan to live in the house, estimate the cost for remodeling or repairs it may require and figure it into your budget. Do the math to ensure that this property fits both your lifestyle and your budget.
• Have realistic expectations. If you buy a property at a foreclosure auction, you’ll  likely never enter the property before becoming the legal owner. You will also get the property “as is.” That means no inspections and the title you get may be clouded with  liens, unpaid taxes and encumbrances. You may even find yourself in the position of needing to evict previous owners, renters or squatters.
• Be flexible. Buying a foreclosure property is more complicated than buying a traditional property. The foreclosure process includes waiting periods, which vary from state to state. With a short sale, it can take months or even more than a year to get all involved parties to agree to a purchase price and terms.
• Keep your options open. By the time you figure in the costs to remove liens, make repairs and pay back taxes, your short sale or foreclosure may not be the great deal you hoped it might be. In today’s real estate market, you may find a great “traditional sale” property that’s well-priced and in move-in condition. Plus, if you narrow your search to distressed homes only, you may not end up in your dream neighborhood or your favorite style of house. Be open to many options to ensure you find the best house for your money.

If you’re a first-time home buyer, don’t go through the process alone. Enlist the services of an experienced real estate agent, one who previously has dealt with foreclosures and short sales, who can minimize your stress, anticipate problems, and help you determine if these types of homes are right for you.