Should I Buy a Short Sale or Foreclosure?

Only if you’ve got plenty of time and a strong stomach. Short sales and foreclosures are not for the faint of heart. On the upside, you can get a serious bargain. Short sales sell at an average 11% discount to similar homes, and foreclosures at 16% off, according to the National Association of Realtors. The downside is that short sales are complex and time-consuming, and foreclosures frequently require extensive renovations.

Before you even consider taking the plunge, understand what the terms mean. When the mortgage amount exceeds the value of the home, owners may attempt a “short sale,” in which the lender agrees to accept a lower payoff rather than foreclose. If an owner can’t—or won’t—pay the mortgage at all, the lender initiates legal proceedings to foreclose and repossess the property, then sells the home itself.

If you aren’t in a rush and prefer not to contend with major repairs, a short sale might be attractive. Such homes are generally in better shape than foreclosures, because the owners still live there and are responsible for upkeep. But they can take months longer than a normal transaction because the lender must agree to the sale. Other liens—unpaid association dues, for example, or a second mortgage—need to be cleared up. And even after all that, the bank may balk at the last minute. To save time and hassle, look for short sales the bank has already okayed, indicated by “approved short sale” in the listing info.

Foreclosures move faster, but properties may be in bad shape, neglected or even deliberately damaged by their owners. About 20% are abandoned—so-called “zombies,” says Daren Blomquist of foreclosure data firm RealtyTrac. But these vacant homes close quickly, since banks have already taken care of any outstanding liens and set a price. Typically banks sell foreclosures “as is” and favor buyers who can pay cash.

If you do pursue a distressed property, use an agent who is familiar with the process and can help expedite the deal by making sure you meet the lender’s paperwork deadlines. The most experienced agents have completed a certification program, such as the Short Sales and Foreclosure Resource (SFR) offered by the National Association of Realtors.