Many people these days ask me about foreclosures, short sales and bank owned properties. Usually these questions come from prospective buyers looking for buying opportunities. In most cases, these questions stem from the news media and, understandably so, some buyers feel that they can get a good deal by purchasing these types of properties.

Hopefully, the following explanations will help you understand what these types of real estate really are. And yes, there are some good opportunities out there as well.

A short sale is a property where the owner can't get enough money for the property to pay the outstanding mortgage balance, closing costs and fees associated with the transaction. Hence, the proceeds of the transaction are short, and do not cover all the costs and debt liability.

Short sales are considered pre-foreclosure properties. If the owner is not able to make the mortgage payments, the bank will eventually foreclose on it. In a short sale situation, in order to complete the transaction, the bank, or lien holder, has to approve the sale amount. The bank knows that they will get less than what is owed but are willing to take a loss. Why, would a bank want to do that? You may ask. Well, the bank will take a look at what it will cost them to foreclose on the house; they will have to pay for legal fees and other expenses to eventually sell the house. Banks will weigh these costs against the short amount and decide what is less expensive to them and cut their losses. Remember, the bank is not in the business of owning houses.

A foreclosure is a property where the owner was not able to meet his/her mortgage obligations. The owner and bank were not able to come to an agreement to sale as a short sale either. Therefore the lien holder or bank then forecloses on the house and the property is sold at the court house auction. Please note that a property can be foreclosed for other reasons other than not paying your mortgage. For instance, a property can be foreclosed because property taxes being delinquent or for federal tax evasion as an example.

This brings us to the Bank Owned Property or REO (Real Estate Owned). The property got foreclosed, but it did not sell at the auction and the bank now takes it back and tries to sell it themselves to recuperate the loan amount. At this stage, the bank now owns the property and hires an agent to market and sell the property for them.

Having explained what short sale, pre-foreclosures, foreclosure property and REO's we get back to the question, can you buy a bargain this way? The answer to that question is; it depends. There are many web sites out there that say you can get huge discounts. In my opinion these reports are sometimes misleading and usually they are trying to sell you some kind of how-to-guide to buy foreclosures. While you can get a good deal, many think that they can get a steal. Usually the perceived great deals require a good amount of work and money to fix or remodel to make the property livable. If there is some equity left over after you fix the property, then you made a good deal.

Ultimately the market determines what the price should be. The reason foreclosed properties do not sell at the court house steps is because they do not have enough equity built into them or they would require more money to fix up than you can sell it for. Investors know market prices very well and know how to estimate costs for repairs and remodeling accurately. My point is that by the time you calculate your total cost; the house plus repair and remodeling costs you end up with a total cost that is lower than the market price, then you made a good deal.

Short sale properties are by the most part "cosmetic fixer-uppers". The current owner simply has deferred any maintenance because they are having difficulties servicing their loan obligations. These houses typically require a fresh coat of paint and new carpets, although I have seen some that are in move-in ready condition these days. Can you get a huge discount? Let's say 100 thousand less? Provably not. The misleading point I have seen on other sites is that they say you can get a huge discount based on a price comparison of the original purchase price at the market high and what the current market price is. Well, we all know that the market has gone down making home ownership more affordable. A market downturn in my opinion is NOT a discount.

A short sale owner is simply trying to sell their house at the current market conditions. The asking price for their home reflects the current market prices and the condition of the property. The owner knows that they can not get more for it unless they wait for the market to recover. The lien holder or the bank knows they will lose money if the property is sold, will they accept an offer of 100 thousand (just to pick a number) less than the current asking price? My guess is NOT. The bank is already loosing money by selling at the current market price in the deal. To ask for another 100 thousand less is asking for a steal. Can you get a good discount? Most provably yes! These may be; closing costs concessions, offering a reasonable price below the asking price, etc.

The real benefit for buyers is that they can get a home that requires some cosmetic work without incurring a huge expense. With today's low interest rates, home buyers can lock in to low monthly mortgage payments and get a very decent house. Put in some elbow grease into the equation and wait for the market to improve and you end up with a great investment!

If you are considering buying a house in the near future, then give me a call at 360.348.3998 in the Washington Seattle-Snohomish area. I will be more than happy to help you find good value.