In this buyer's market, some homebuyers ask themselves: Will purchasing a short sale or foreclosure end in disaster -- or yield a jackpot?
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And which type is best to go all-in with: a short sale or foreclosure?
"There's really no cut-and-dry answer," says Gwen Daubenmeyer, a certified distressed property expert with Re/Max in the Hills in the Detroit area. "It really depends on the buyer and what the buyer's priorities are."
Before starting their search, homebuyers who want to play their cards right should know the benefits and drawbacks of buying either type of "distressed" property: foreclosures and short sales.
Benefits to Buying Foreclosed Homes
According to Lender Processing Services, nearly 2.2 million homes in the U.S. were in foreclosure in April. On average, they sell for about 30 percent less than a nondistressed property, Daubenmeyer says.
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In April, the median price of a move-in ready foreclosure was $185,000, according to Re/Max. A nondistressed property's median price was about $267,300.
Such deals are possible because homebuyers can negotiate closing costs and price in foreclosure sales, says Elaine Zimmermann, a real estate investor in Memphis, Tenn. Buying a foreclosure typically is faster than buying a short sale, and an investor can buy a home for rock-bottom dollar. The national average of a foreclosure that needs some work may cost around $107,600, according to Re/Max. The investor could rent out the home or resell it after fixing it up.
Investors should expect to spend no more than 5 percent to 10 percent of the purchase price to renovate a foreclosed house, Zimmermann says. "Your time and trouble are worth something, and your energy," she says. "You should come out ahead."
Drawbacks of Buying Foreclosed Homes
Are you sold on the idea of buying a foreclosure? Not so fast. Proceed with caution because there's potentially a cost to that low price: a damaged house.
David Richardson, an inspector in the Detroit area who's certified by the American Society of Home Inspectors, says he has seen his share of ransacked homes. As a buyer, you could encounter scarred walls, carpets or appliances that were damaged by the former owner, he says.
Sometimes, time and neglect are the culprits. Turned-off utilities coupled with the house sitting empty for months can do a good share of harm.
However, he says, some foreclosures are "immaculate." And if you scope out a property that's run down, there's still hope.
"If a person is handy, and you have a high tolerance for defects and you can fix this stuff, there are just a ton of opportunities out there," Richardson says.
But in some foreclosures, the condition of the home may be the least of your worries.
If you buy a foreclosure at auction sans research, you won't get to take a peek to see if the plumbing works, if the walls are cracked -- or if there's a lien against the property. You'll be responsible for these cosmetic and legal issues, so many investors research the property's history before the auction. Usually, savvy investors take on these types of sales.
Benefits of Buying Short Sales
Looking for a foreclosure-home price but in better condition? Sift through short sales in your local market, Daubenmeyer says. A short sale is still owned by the homeowner, who owes more on the mortgage than the home is worth.
"The short sale is, in my opinion, far better than buying a foreclosure because the home is generally in better condition because it's been occupied," she says. "The utilities have been maintained, usually the lawn is maintained, those kinds of things."
In April, the median price of a short sale home was $218,500. By comparison, a nondistressed property's median price was about $267,300, according to Re/Max.
Short sales often take a notoriously long time to close. Enter the federal Home Affordable Foreclosure Alternatives program, or HAFA, which helps the buyer and seller by speeding up the short sale process. "It's not perfect by any means," Daubenmeyer says. "But it has created a timeline that we can hold the mortgage lenders accountable."
She recalls recently closing a short sale deal in 58 days through HAFA, and she knows other certified distressed property experts who have been able to close in 30 days or less.
If possible, she says, work with a seller through the HAFA program to speed up the closing process.
Drawbacks of Buying Short Sales
The name "short sale" can be deceiving -- these deals can drag on for months. Some sellers assume they can start this process on a whim, Daubenmeyer says. "It's not a 'get out of jail free' card," she says. "You have to qualify for a short sale."
After the seller is approved, the first question a buyer should ask is whether there are two mortgages on the house.
"If there's a second lien holder on the short sale, that transaction can get ugly for a seller," says Carla Weyrick, a Realtor with Allen Tate Co. in Charlotte, N.C.
Every entity that has a financial stake in the house has to agree to the short sale, she says. If the sale price of the home won't pay off the second mortgage, that lien holder may not get paid -- so the lender can block the sale.
In the meantime, the buyer is stuck waiting for the answer. You'll need to know when to hold and when to fold.
Know What You Want
Nothing in real estate is a sure thing, but you can bet on getting a good deal if you know what you're looking for in a home. If your family needs a house within one or two months, a foreclosure may be a good option, unless the seller is qualified in the HAFA program. If you have more time to work with, short sales could be within your realm of possibility.
Know your tolerance for defects and whether you have the time and money to fix up a house before buying a distressed abode. If the choice is right, you could help a homeowner stave off a foreclosure if you buy a short sale, or you could help alleviate the nation's glut of bank-owned properties.
You can snag a great deal with either a short sale or a well-maintained foreclosed home, Daubenmeyer says, but one requirement remains: You must find a good real estate agent.
"Deal with people who are educated and aware," she says. "There are tremendous deals with short sales on houses that are in really great condition. While it isn't a piece of cake and it isn't a party, (homebuyers) can close."