Should You Invest in Foreclosures and Short Sales?

As you shop for your new home, there are a few options you naturally consider. Location, the size of the house, whether it’s a single-family dwelling or other home, school districts and – you guessed it – price.

Buying a foreclosed or short sale home can be a great way to get a fantastic deal on a new home. But, as with any purchasing decision, there are pros and cons to these options. Let’s take a look.

What are Short Sales and Foreclosures?

As you know, a homeowner never truly owns a home until the mortgage is paid in full. Until that happens, the house belongs to the lending institution that financed the loan.

Unfortunately, sometimes people fall behind on their mortgage payments. When that happens, the bank sometimes gives the homeowner “one last chance…” He can sell the home through a private agent for less than what’s owed.

That’s called a short sale.

In more extreme cases, the bank has actually “repossessed” the house. The homeowners have been evicted, and the home is now in the hands of the bank.

Obviously, the bank wants to liquidate the asset, so they try to sell the house. Generally speaking, the house is listed for a price that reflects what was owed on the home when the homeowners left.

That’s called foreclosure.

You can buy a foreclosed or a short sale home for considerably less than a house that’s even in the same neighborhood. In fact, it’s a great way to keep your payments low, or to buy an investment property.

Of course, there are a few “cons” associated with buying a foreclosure or a short sale.

1. There may be “hidden” fees.

Before you make an offer on a foreclosure or a short sale, you’ll need to consider the costs. Sometimes there are transfer fees, negotiation fees or other costs you’ll be responsible for. These should be considered a part of the selling price, and factored into your budget.

Liens against the home are public record, so be sure you look into those as well. Sometimes the bank wipes these liens out when the house is foreclosed, but that’s not always the case. If not, you’re responsible.

Additionally, in the case of a condo or a HOA property, check with the community president (or whoever is in charge of billing of HOA fees). It could be that the homeowners didn’t pay their annual or monthly dues, and you could be responsible for those, too.