For Buyers

Purchasing a foreclosed or short sale property

What's the difference?

A foreclosed (REO) property is owned by a financial institution or a government agency. 

A short sale property is owned by an individual homeowner but the value of the property has dropped below the amount of the homeowner's mortgage.  So the lender will end up "short" - they will not be paid the full amount they are owed.  For an example of a short sale scenario, click here.

Purchasing a foreclosed property

The process of buying a foreclosure is similar to buying any other property, but you are buying from an institution rather than an individual homeowner.  A few things you should know:

• Foreclosed properties are sold "as is"; the owner will not make any changes or repairs
• The owner cannot provide any information regarding the condition of the property.
• You have the right to have the property professionally inspected, and to cancel the contract if you choose.  Inspections must usually take place within 5 business days of contract signature.
• All inspections and other testing will be done at your expense.
• Mortgage prequalification or proof-of-funds will be required with your offer, and your earnest money must usually be paid via certified check.
• If you are purchasing the property as your primary residence, you are usually given preferential treatment when purchasing a property from a government agency.

                           With any real estate transaction, it is critical to consult an attorney.

Purchasing a short sale property

Purchasing a short sale is unlike most other real estate transactions.  Since the outstanding mortgage will not be paid in full, the mortgage lender must approve the selling price as well as the other terms and conditions of the contract.  This approval process usually takes a long time, sometimes several months.  After the review process, the lender may accept the contract as written, the lender may reject the contract, or they may offer to negotiate the terms of the contract.

Short sale properties are usually sold "as is"; the homeowner will not make any repairs or improvements.  You have the right to have the property professionally inspected and cancel the contract if you choose.  We recommend that the inspection be completed immediately after contract signature.

The advantage of buying a short sale is they usually sell below market price.  Both the seller and the lender are under pressure to make the sale to avoid a foreclosure scenario.

The disadvantage is the uncertainty over the final price and closing date. 

Purchasing a short sale property might be for you if you can be flexible with your closing date.  If you have a fixed moving date, you should probably avoid these transactions.

                           With any real estate transaction, it is critical to consult an attorney.

Short sale example

Mr. & Mrs. Smith purchased their home 5 years ago for $200,000.  They made a 10% down payment and took out a mortgage for the remaining $180,000.

Mr. Smith has been told by his employer that his job is being moved to another state so they must relocate.  Sadly, the value of their home has declined to $170,000 due to the current economy.  If they sell their home at the current market price they will not be able to pay back their $180,000 mortgage.