Understanding Foreclosures, Short Sales and Bank Owned Properties Buying foreclosures can be tricky and it is important that you understand the process before you decide to buy one of these homes. Foreclosures usually fall into a couple of categories- pre foreclosures, short sales, sheriff’s sales, bankruptcy auctions, bank owned properties, or HUD/VA owned properties. It is important to understand the differences of each of these. Pre foreclosures - these are properties where a homeowner is behind on their loan and are about to loose it. When you present an offer on a home like this it is important to understand that there is a possibility that the bank will foreclose on the home while you are in contract to purchase the home. This would nullify your contract. Usually, the courts ( or the existing lender) will delay the foreclosure proceeding if the seller shows them that they have a qualified borrower. Timing is important, and we don’t advise you to try to obtain financing that takes a while to process. Discuss this with your loan officer.  Short Sales - A short sale is when you present an offer on a home that is less then what the owner owes on the home. When this happens, the owner needs to request that their present lender accepts less then what is actually owed on the home, to release the lien on the home. Understand that, even if the homeowner agrees to sell you the home, the bank may not agree. It can take a couple of months for the bank to decide. During this time you must start your mortgage process. Usually, when the bank does agree, they will want a quick closing. If wait until bank approval before you start arranging your financing, you might not have time to get everything in order before the bank requested closing date.  The advantage of this type of transaction is the fact that you can, at times, obtain a home at slightly lower then market value. The disadvantage is that you will have to spend money on a mortgage application, without being sure if you are even going to be able to buy the home. If you have limited funds, this might be a good idea. If you have enough funds to risk this loss, then it may not be a bad idea. Your realtor can guide you with finding these homes. It is possible that a short sale is also a pre foreclosure, at which point you have both issues to contend with.  Sheriff’s Sales and Bankruptcy Auctions - These are court ordered sales of homes. Sheriff’s sales are usually foreclosed on properties. Bankruptcy auctions are due to homeowners filing for bankruptcy that still have some equity in the home. In both these situations, the present lender will send a representative to bid on the home up to a set dollar amount that they determine. If the bidding continues above the number that they set, then the home will end up being given to the highest bidder.  This is a great way of obtaining a home below market value, assuming the present sets their “upside” below the market value. The problem with these auctions, are the home is bid on “as is, with no contingencies”. The bidder needs to have 20% of their bid with them at the auction, and must take title within 30 days, or the down payment is lost. Unless you have “deep pockets” and can buy these homes for cash, we do not suggest you explore this route.  Bank owned and HUD/VA owned properties - When a property gets foreclosed on and the bank ends up with the property at the sheriff’s sale, one of two things happen. If the original loan was a conventional loan, the bank will list the property with a realtor to sell. If the original loan was a VA or FHA, these agencies will take over the property and sell the home. The agency will then post the property on their web site and have a closed end bidding auction on the property, with a minimum sales price set. On select properties, the VA or FHA has special financing available. Most realtors have access to the HUD and VA foreclosure list and can guide you through the bidding process. Most realtors also have access to the bank owned properties listed on the MLS. At times a potential homebuyer can get a very good deal on these homes.  Just remember that most of these transactions are as is properties, and require a quick closing. Have your loan pre approved before you bid on one of these properties, and be prepared to handle all repairs and deficiencies on the property yourself. Also, understand that the banks are looking for strong contracts with quick closings. There is a very good possibility that they will accept a lower offer with a larger down payment, before a contract with an FHA or State bond mortgage and a longer closing. You might have to put offers on several properties before you find a bank willing to accept your offer.