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Home Buying 101

Searching for a Home

The 411 on Foreclosures and Short Sales

With foreclosures and short sales at an all-time high, there’s great potential for getting a great deal on what could be your dream home. But before you decide to sign on the dotted line, you’ll want to make sure you’re informed.

Know the Difference

Foreclosed homes are bank-owned, and the lender is trying to recover the mortgage balance because the owner is no longer making payments. This means it’s up to the bank to accept your offer and, unlike traditional home sales, the bank is not required to make any necessary repairs or pay for a home inspection. Foreclosures are sold at discounted prices, but they are usually sold “as is”, which means you pay for repairs and inspections.

When a home is sold as a short sale, it means the homeowner is negotiating with the lender to sell the house for less than what is owed on the mortgage. For the homeowner, this is often a better alternative than foreclosure, but it’s a lengthy process. This means the buyer may have to wait several weeks or months before receiving a decision on their offer. If time is of the essence because of a lease termination or other restrictions, your best option may be a foreclosure, since short sales can keep you waiting for several weeks or months. Short sales are also sold at discounted prices with an “as is” clause.

Find an Experienced Realtor

Working with a realtor who has experience with bank-owned properties is a good way to start your search. They can give you insight and walk you through the foreclosure and short-sale home buying process. Your realtor should be able to assess the neighborhood of the home you’re interested in and help you determine a realistic offer. Paying 20% under the neighborhood market value is possible. But just because you may be getting a good price doesn’t mean it’s a good investment. You’ll want to check comparable sales (comps) in the area to determine if the home will keep its value and appreciate.

Consider the Costs

Depending on the condition of the home, a foreclosure or short sale may end up costing you repairs, which means you may ultimately pay more for the home than expected. But depending on how much below market value you pay for it, you may have instant equity. Neighborhoods with a lot of foreclosures or short sales can keep property values low, which could make for a risky investment.

If Possible, Pay with Cash

With the state of the economy, many lenders are favoring cash transactions and offering even deeper discounts on properties just to get rid of them. If you’re not able to pay cash, make sure you are pre-qualified or pre-approved before making an offer. This makes you a more credible candidate when your offer is presented. You’ll also want to ask your lender about special financing options for foreclosures like HomePath®, which offers a lower down payment and more flexible mortgage terms.

Time Your Offer Just Right

The end of a month, quarter, or year can be the best time to make an offer on a foreclosure or short sale. Lenders are looking to get deals closed and off the books, which improves the chances of them accepting an offer. If you’re paying cash, the odds are even more in your favor.

Make the Right Choice

By keeping the above points in mind, you’ll be on your way to determining the best option for your budget and time constraints, while also getting the most for your money.