Short Sale vs. Foreclosure: Which is the Better Option

The spike in short sales and foreclosures has opened new opportunities for investors, with homes selling for as much as half the fair market value. But few investors recognize the difference between short sale and foreclosure properties. They both offer good deals, sure, but it’s the little things that often make the biggest difference. Knowing the difference can help you avoid common pitfalls and make the most out of every deal. Here are some of the main points that distinguish foreclosure and short sale properties, and what they mean for investors.

Price cuts

Foreclosures tend to be cheaper than short sale properties because most banks just want to break even, or at least cover the foreclosure costs. This is why most homes that go below 40% of the market price are usually foreclosure properties. Short sales, on the other hand, are at most equal to the fair market value. They may go below since the home has negative equity, but because banks want to make as much as possible off the deal (thus reducing their losses), offers on short sale properties have to be as close to the appraised value as possible.

Home repairs

Homes in foreclosure tend to be in bad shape because the owners have no incentive to maintain them—after all, it’s the bank’s problem to fix it up and sell it. So what you save in a foreclosure may easily be wiped out by repair costs, especially since foreclosure properties are sold as is. In a short sale, it’s the owner selling the home, so they’ll put in more effort into making the home fit for sale. Most short sale properties are well-maintained and are open for negotiations on repair and inspection, so you can request certain upgrades or additions, although it can prolong the buying process.

Buying process

Perhaps the most obvious difference between the two is how the sale takes place. Foreclosure properties are sold in an auction wherein the home goes to the highest bidder. This all takes place in one day, usually at a sheriff’s office. Short sale properties are sold much like regular homes, except that offers have to be approved by the bank instead of the seller. This means the short sale can take anywhere from a month to over a year to complete. To tell whether a home on the list is a short sale, look for a line on the listing that says offers are subject to bank approval.