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Buying a Foreclosure, Part 2

Editor's Note: This the second article in a two-part series. To read part one, click here.

We are frequently asked this question by purchaser clients looking to find the very best value in a home (rightfully so!). We will make an important distinction up front. This article is directed primarily to Military Families looking to purchase a home as their primary resident which is a completely different animal from purchasing investment properties. While they may consider keeping the home after a PCS and converting it to an investment property, the two require a totally different mindset and analysis. 

This article will address Short Sales and Pre-Foreclosures.

A foreclosure is closely related to the short sale. This occurs when a homeowner knows they are in financial trouble and negotiates an agreement with the lender to sell the home for less than they owe. The terms of the sale (or the price) are subject to third party approval by that same unemotional lending institution. If not sold in a specified amount of time, the short sale will likely lead to foreclosure.

Generally, the lending institution views this as an alternative to the legal action and the expense of foreclosing on the home. They evaluate the loss incurred by a short sale compared to the loss/expense of a foreclosure. The distressed seller may avoid a record of default or bankruptcy but will likely suffer an unfavorable credit status.  If you are a seller considering this option you should also be aware that this could have significant tax implications as it may be viewed as a ?forgiven debt? and considered as income -- by all means, get professional tax advice.

A short sale will probably be listed with a Realtor  and found in the MLS. In the typical short sale case, the purchaser/agent will negotiate with the owner, but the contract still must be approved by the "unemotional" lending institution. Thus, the purchaser must wait for an answer from the seller and the approval from the institution. It should be obvious that this process can be slow and frustrating.

Pre-foreclosure is a situation in which a home owner is approaching default or has been served notice by the lending institution of impending legal action. The notice by the lending institution is generally served to the owner, and then recorded in the local courthouse; and in many cases is made public through local newspapers or other local customs.

Everyone has seen the TV infomercials, e-mail promises, etc. of how to get a great deal or get rich by buying distressed properties or pre-foreclosures. Just pay a few bucks and get the Pre-foreclosure lists and all the secrets to how it's done. Then sit back and watch the dough roll in.

I am not sure where all of these lists originate, but some are undoubtedly compilations from the courthouse records or other credit record sources. Generally by the time these lists are published, it is already in full foreclosure or purchased by an investor who spends a lot of time at the courthouse and does this professionally. Seasoned investors will tell you that they may view and evaluate dozens of properties before they find one that makes sense -- and that takes time. They will also tell you that they must be aware of, and comply with any state and local laws that exist specifically to ensure that distressed sellers are not exploited.

Pre-foreclosures may or may not be listed in the MLS. The willingness of the seller to negotiate a favorable below market price may depend on many variables to include their realistic view of "market value." 

The VR SAM conclusion is that most military families seeking a primary residence, will have better success finding the home that meets their personal needs (commute, financial, schools, etc.) through conventional means (advertisements, MLS, etc.). Searches focused exclusively on Foreclosures, Short Sales, and Pre-foreclosures will eliminate many eligible homes, may require a significant time investment, and will not necessarily guarantee purchase of a home "below market value." 

Many distressed properties will be advertised through conventional means such as the MLS, print and internet advertisement. If you find one that meets your residence needs and appears to be a good deal, be prepared for a more encumbered negotiation/contract process if you choose to write a contract on those homes. By all means, seek professional advice from Realtors , attorneys, and tax experts as appropriate.

We hope this helps answer many of the questions about Foreclosures, Short Sales, and Pre-foreclosures. As always, we invite your thoughts, comments, and questions. Thank you for serving. 

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