The difference between Foreclosures, Pre-Foreclosures and Short Sales and and if they right for you.

Short Sales

The Deal: A short sale is a property that is individually owned, but the owner owes more money on the property than what they could sell it for on the open market.  This means that they need to get permission from the bank or third party to sell the property at a loss and walk away instead of having the bank foreclose on the property.

The Bad: The problem with short sales is that they are very labor intensive on the selling side since the seller's representative needs to deal with both the home owner and the bank.  Some banks are faster and more resonable than others.  The process can take months or even years to complete.  Since the sellers are walking away with nothing, many times they are uncooperative or do not have the funds to make any concessions for home inspection issues which makes the transaction riskier for the buyer.  There is no telling exactly what you will be paying or when you will be closing when you enter a contract on a short sale.

The Good:  The good news is that since these transactions require more risk, they can be bought a a discounted price, just like any investment.  Unlike foreclosures, since the original owner still has access to the property, home inspection issues, or issues with the CO inspection are still able to be fixed prior to closing.  This makes it much easier to obtain financing on the property and reduces the risk of the deal falling through during inspection periods.

Is a Short Sale right for me?  If you have specific time frames in which you need to close or if you are trying to close multiple properties simultaneously, a short sale if definitly NOT for you.  But, if you have a flexible time line and are not adverse to risk, short sales have proved to be very good investments for people who can wait.  These are especially good alternatives for buyers who need a below market purchase price but have strict FHA regualtions that might require repairs to be done to the property prior to closing.

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Foreclosures 

The Deal: A foreclosed property is a property that has been reposed by the bank or thrid party lein holder.  Although there are many ways of going about this, most likley, the property has gone to a Sherrif Sale and if no investors have purchased it on that day, the bank reposeses the property and takes full ownership.  The previous owner is no longer in the picture.

The Bad: Just because a property is foreclosed on, doesnt necessarily mean it is for sale.  There is a property preservation process that every home has to go through prior to posting the home for sale.  Please make sure that when you are searching for a foreclosure, make sure that is is actually for sale and not just foreclosed.  Unlike Short Sales, the bank has more strict rules regarding inspections and repairs and every bank is different.  Almost all banks will refuse to allow any repairs to be done to the property prior to closing.  This causes a Catch 22 for buyers.  Although a foreclosure is affordable, if you are getting any type of financing, the financing party will not close on a  property that is in disrepair.  The bank will not let any repairs be done to the property prior to closing... this makes it difficult for first time home buyers or buyers with small amounts of cash on hand to take on a foreclosure.  

The Good:  The good news is that foreclosures are sold drastically below market value due to the risks and work involed.   Since there is no actual home owner to deal with, there is very little emotion involved and there is very little back and forth.  Unlike Short Sales the bank already knows what they want for the home and they want to close quickly.  These deals tend to not be as drawn out and can allow for a little better planning for closing dates, but not always.

Is a foreclosure right for you?  Foreclosures cater more to cash buyers or buyers who have extra cash on hand and conventional finanicng.  These buyers can close with a temporary certificate of occupancy and do the repairs post closing.  203k Loans are a good option for FHA buyers with little cash.  Since this is a construction loan, this allows the mortgage company to request specific repairs to be done and hold a certain amount of money in escrow to do it.  This way they are comfortable closing on the property without having the repairs done up front. Read more about 203 K loans HERE.

If you have any specific time frames needed for closing, are trying to close simultaneously on a home with mortgages and do not have enough cash on had to cover suprise repairs or casts, a Foreclosure might not be fore you.  If you are an investor, cash buyer or have the stomach for the risks involved in purchasing a foreclosure, then these can prove to be very profitable investments.  If you happen to be handy or have close ties with a construction company, a 203k loan is a very good alternative and a safer way for first time home buyers and buyers on a limited budget.

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Pre- Foreclosures

The Deal: These are properies that have fallen behind in mortgage payments and have the potential to be foreclosed on.  

The Bad:  Pre-Foreclosures are not Foreclosures.  They are not bank owned yet and are not for sale.  The process could take years for the property to be foreclosed on and even when it is, can take even longer for the bank to actually list it for sale after it is foreclosed on.  Many times pre-foreclosures never end up being foreclosed on at all.

The Good:  Pre-foreclosures are listed on online sites to give you a heads on on potential listings.  If you are in the market for a foreclosure, keeping an eye on pre-foreclosures could give you a leg up on the market.  

Are Pre-Foreclosures Right for you?  If you are an investor who would like to purchase a home at a Sherriff Sale, compiling a list of pre-forclosures and following them closley might be a benefit to you.  You can do your own research prior to the sherrrfif sale roster coming out every week and have a leg up on the competition.  If this doesn't sound like something you are interested in, wasting too much time on a pre-foreclosure might be a waste of time fo you.

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Sheriff Sales

The Deal:  A property that defaulted on the mortgage and was not sold as a short sale noramlly goes to a Sheriff Sale at the local County level.  This gives the general public and opportunity to bid on the property.  Normally these have starting bids based on the amount owed and if they do not reach the starting bid or get close to it, the bank will reposes the property for a dollar.  Sherfif Sales require a large cash deposit up front and then allow a certain amount of days for the rest of the money to be paid in cash (Bank Check).  Normally, the previous home owner will have a certain amount of days to reclaim their property by paying the debt back in full.

The Bad:  Since a property that goes to sheriff sale most likey has not reached the open market, they normally need to be  purchased sight unseen.  This can be extremley risky since the condition of the property and latent defects can be unknown. Sometimes, properties can have title issues and additional leins that are unknown.  The unknowns regarding the condition of the home can lead to many nightmarish conditions and potential huge renovation costs if you are not dilligent and cautious.

The Good:  Because of the risks involved, Sheriff Sales and be purchased at extremley discounted prices.  If done correctly, these investments can be purchased at pennies on the dolar and create significant amount of value to the investor.  There is no negotiating after the auction, theres no crazy closing costs, once you own it you own it.

Is a Sheriff Sale right for me?  If you are not an experienced investor, don't have 150% of the purchase price in cash and are not prepared to loose the money you are bidding with, I advise againt attempting to purchase a home at sherriff sale. These are very labor intensive, require a lot of leg work and inhearently super risky.  Purchasers need to have a high level of local market knowledge, access to cash and contractors and be prepared to take on huge risks in order to properly invest in sheriff sales.

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