Save money by purchasing a distressed property

You can save money on your new home purchase if you buy a home that is bank-owned, an REO or a short sale. There are advantages and disadvantages to each. These are the things you should consider when thinking about buying a distressed proprety.

Bank-owned (Real Estate Owned - REO)

Bank-owned homes are properties that banks have acquired through the foreclosure property. Because banks lose money everyday that the home is on the market these properties are usually priced to sell, sometimes even below market value - therefore buyers can gain some instant equity by buying bank-owned homes. One thing to be careful about is the condition of the home. Some sellers are not able to properly maintain their home due to their tight financial situation so the condition of the home may not be as good as other homes on the market. When sellers are forced to move out they may not take care while doing so and leave the property in worse condition as well. Banks typically sell the home "as-is" so you may not get any additional help money to help with repairs. While the condition may turn off some buyers, it may also create an opportunity to earn some sweat-equity. If you do an inspection and find that the repairs needed are within your scope of work, you might be able to do the work yourself and earn some equity right after you aquire the property.

Short Sale

A short sale situation is created when the seller owes more than the market value of their home. In order for them to sell their home they need the bank to agree to accept less than what is owed. Banks do not want to go through foreclosure proceedings because it is costly for them. They would prefer to sell the home in a short sale, because in the long run it is less costly for them. This can sometimes create an opportunity for a buyer to obtain the property for less than the market value. The disadvantage of a short sale is that the buyer doesn't know how long it will take for the bank to approve the short sale, which could be anywhere between 30-120 days and sometimes even longer. And the bank may not approve the short sale after all that waiting. If the buyer is in a hurry to move they may not be able to wait for the banks response. If the buyer is able to wait it may payoff because short sale homes are typically better cared for and in better condition than homes that have been foreclosed, or bank-owned properties. 

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