Before comparing the pros and cons of both short sale properties and foreclosure properties, it is important to understand the process. Foreclosure is when a mortgage borrower goes delinquent on their mortgage. They can no longer pay it and have exhausted all other options. The home is typically sold at a foreclosure auction or ownership reverts back to the original lender.
As for short sales, they are foreclosure alternatives. Foreclosure is damaging to credit reports and costly for lenders. Instead of foreclosure, the property is sold before. It is sold for less than the outstanding mortgage due.
So, what is better? Foreclosures or short sales? It depends.
With short sales, lenders have the final say. They approve all purchase offers. With that said, they rarely suggest a short sale themselves. They hope the borrower will make good on the amount due or sell the home at fair market value. The borrower, when they realize they have no other alternative, approaches the bank about a short sale. They know they must leave the property as soon as it is sold.
On the other hand, most foreclosures result in unruly evictions. Some home occupants refuse to leave without force. Essentially, with foreclosures, you may be left with difficult home occupants who won’t leave unless the authorities intervene.
If you are looking for less hassle after the sale, it is best to go with short sales or purchase vacant foreclosures.
With short sales, you pay less than the outstanding mortgage due. This typically means a good value for your money. For example, you could purchase a well-kept single family home for $50,000 if the outstanding mortgage amount is around $60,000. This is a lot of money, but that $50,000 can buy you a $100,000 or more home! On the other hand, foreclosures are often sold for dirt-cheap. The price you pay will depend on the property and the competition at foreclosure auctions. Also, remember that those who allow their homes to go into foreclosure have reached the point where they don’t care anymore. This may result in an unkempt or damaged home.
If you are looking to turn the largest profit, foreclosures are your best option. If you are looking to get the best value for your money, short sales are the way to go.
Foreclosure auctions have many rules and restrictions. These vary by state. In most cases, payment is required within 24 or 48 hours. Most often, professional investors with needed funds on hand attend and win at foreclosure auctions. Most have unlimited financial resources. If you want to buy a new home or are just getting started with real estate investing, you may need to secure financing first. Unless you have spotless credit, most lenders will not finance the possibility of you winning at an auction. They will, however, provide financing for short sale properties.
If you have no financial concerns, both foreclosures and short sales are ideal. If a home loan is needed, speak to lender, but they will most often suggest a short sale purchase.
In short, both short sale and foreclosure properties present good opportunities. Whether you are an investor or a hopeful first-time homeowner, keep your options open. You never know what you will find or how good of a deal you will get until you look.