Short Sales, Foreclosures And Bank-Owned Properties – Part 1

There are many properties in some stage of foreclosure or taken back by lenders at this time and a lot of buyers ask about these because they've heard about how this is where you can get an incredible deal. After more experience with these types of properties I've found that there is a lot of false information and hype out there and want to provide you with some more information that can help you understand this whole subject a little better.

During the boom years there were tons of seminars and books on how to make a fortune in real estate by buying and flipping houses. Though some people were able to make good money quickly that way during the period of about 2003 to mid-2005, many others are now part of the foreclosure statistics.

Similarly, there are now lots of websites, seminars, books, etc. on how to make your fortune buying foreclosure properties. They present stories of exceptionally good situations that make it sound like this is how every foreclosure situation goes even though it is really more of a rare occurrence for the average person. Maybe these are the same people who promoted the seminars and books on “flipping” (and maybe they are also the ones who email you about winning the UK lottery or about the $50Million they want to send you from Nigeria:).

That's not to say that there aren't good deals available in properties that are in some stage of foreclosure, there are. For example, in March I saw a condo in Palm Harbor priced $25,000 less than the one a client of mine bought last year (which was already $50,000 below what they were priced for in 2005). But this current one also has a garage and upgraded kitchen countertops and cabinets (which my client's condo didn't have).

Another example is a house in Dunedin that one of my clients is buying which is priced about $20,000 less than comparable properties in the same area and is in good condition. So it is true you can find some properties that are good deals.

BUT - there are some things you'll need to understand because the process can be quite different from the normal.

First of all there are some different types of 'foreclosure' properties and I want to start off by clearing this up for you.

There is a 'pre-foreclosure'. This is a property where the owner has fallen behind on their payments to a point where the bank has begun the foreclosure proceedings (usually by filing a notice of pending legal action).

There is a 'short sale'. This generally means a pre-foreclosure property where the property is being listed at a price that is less than what is owed on the outstanding loans. You can recognize these in listings as it will either say "short sale" or "3rd party approval needed" or “list price may not be sufficient to cover all encumbrances” (meaning that the bank will have to approve it in addition to the seller accepting the offer).

One word of caution though, some realtors will list a property as a short sale or "possible" short sale without even having their client complete a “short sale package” (the paperwork that will have to be submitted to the bank with any contract) - avoid these as in most cases they end up going nowhere or take months to hear anything back.

There are also "bank-owned" properties. Bank-owned means the bank has completed the foreclosure proceedings and now owns the property fully. These are usually the easiest and quickest of the different types of foreclosure properties to deal with although they are sometimes (not always) in pretty bad condition.

That gives you a basic overview of the types of “foreclosure” properties you may run into. In Part II, I’ll go over some information that will be important to know if you are considering purchasing a property in any stage of foreclosure.