Everyone wants a bargain, especially now. If you can buy a home for less than its market value then you are first in line for equity gain as prices move back up.

Foreclosures and other distressed sales are the obvious places to look first. If the sale is 'distressed' then it must be a good deal, right? Not always. While some distressed sales can be spectacular bargains, this is certainly not always the case. If you are going to consider one of these properties then there are several things you need be aware of before you start your search.

You need to know the difference between a foreclosure and a short sale, and which of these two categories the homes you are considering fall into. The MLS listing information doesn't always make this clear, so if you want to know which category any particular home falls into, ask me.

A foreclosure is a home that is legally owned by the bank that previously held the mortgage on it. Title has been transferred to the lender, and the previous owner is no longer in the picture. A foreclosure is often known as bank-owned, or as an REO (real estate owned) property.

A short sale, or pre-foreclosure, is a property that is offered for sale by the owner. It has not gone through foreclosure, although this may be in process while the home is on the market. The definition of a short sale is one in which the net proceeds of a sale at the asking price would not be sufficient to satisfy the outstanding mortgage and other debts on the property.

This means that the lender has a say in whether the sale should proceed at a particular price, because allowing the sale will require the lender to accept a loss. If the lender is aware that the home is being offered at a price that is below the outstanding debt, and in particular if he has already approved the sale price, the selling process can be quite straightforward. Unfortunately, this is not often the case, and first thing a lender hears about the sale may be when a contract appears on his desk. This is when short sales can become a bit of a nightmare.


Distressed sales, good or bad?

More about foreclosures

More about short sales