How do people buy foreclosures and short sales?

Although there are a few tricks, and it takes a bit of patience, it's really not that much of a mystery. Like most home sales in our area, foreclosures, REOs, and short sales are usually listed for sale through Realtors^®, entered into the Multiple Listing Service (MLS), and sold to buyers who are also represented by Realtors^®.

The processes differ from normal sales and from each other in several important ways, as described below. (It is possible to buy a foreclosure at auction on the courthouse steps, but this is very rare for several reasons, for instance the minimum bid required by the lender at this auction may be more than the market value of the property.)

Foreclosures/REOs:
For a few weeks before an REO can be listed and sold, a notice is posted on the property, the listing agent's sign may go up, and the property may be available for previewing.

Once a foreclosure is listed for sale in the MLS, the buyer makes an offer through their Realtor^® to purchase the property from the bank (who is the seller). The bank either accepts the offer or makes a counteroffer, and the price and terms are eventually decided upon. The buyer puts down a deposit and then, during the escrow period, has an agreed-upon number of days to do inspections, investigate the property, and, if necessary, get approval on a loan to purchase the home. Like most sales, escrow closes after all terms have been met, the paperwork is complete, and the purchase money is transferred to the bank that is selling the foreclosure property.

The main differences between the sale of an REO and any other house is that 1) the bank that is selling the property has little information to disclose to the buyer about problems with the structure, the grounds, or the neighborhood (as they have no prior, direct knowledge having never lived in the home); 2) the bank will rarely make any repairs to the property; and 3) the investigation and escrow periods may be quite short.

Short Sales:
In the case of a short sale, a buyer submits an offer to the homeowner who is selling the house, not to the lender. Once the buyer and seller agree on a price and terms, the offer goes to the seller's lender(s) for approval. It is possible to get a quick response, but it could take a lender 6 weeks or more to respond. The turnaround time depends on how many other short sale requests the bank has, how long it takes the bank to get the property appraised and determine its market value, and whether or not there is more than one loan. Often it is the seller's Realtor^® who keeps in contact with the lender(s) and tries to facilitate agreements between lenders when more than one is involved, though there are short sale specialists who can help facilitate these transactions and interface directly with the lender(s).

The lender(s) may agree to the purchase offer that was submitted, reject the offer, or make a counter offer on price and/or terms. Once a short payoff price and terms are approved by the lender(s), the sale can proceed. Usually this is when the buyer does their investigations and inspections and gets a loan to purchase the property, but sometimes the buyer decides to get started before approval is finalized, especially if the Realtors^® are in close contact with the lender.

The trick with a short sale is to get it approved and escrow closed before the foreclosure process is concluded and the property becomes an REO. Even though lenders want to avoid foreclosing, there is no guarantee that the short sale price will be approved. Because of this, and since it can take weeks for approval, a buyer needs to be patient and willing to try purchasing the property without guaranteed results.