Short Sale vs. Bank-Owned

You've probably heard the terms short sale, bank-owned, pre-foreclosure and foreclosure before. It's hard not to have heard them, given the recent attention they've garnered. However, what do they mean? What are the differences between them? Which option might be best for you? Here's our breakdown of the terms to help you answer these questions and more:

1.) Short Sale a.k.a. Pre-Foreclosure

Definition: Occurs when a homeowner is behind on his payments and owes more than the property is worth. The home is listed for sale until an offer comes in. The bank, after reviewing the owner's reasons for being delinquent, agrees to take less money than is owed, allowing the owner to sell.

Disadvantages: The major disadvantage is time. Once you submit an offer to the bank, it can take anywhere from 30 days to six months to get an answer. Additionally, other buyers can make offers while yours is under consideration. If they offer more money, you are forced to increase your offer or find another property. Finally, short sales can be in poor condition as sellers no longer have the money nor the motivation to perform routine maintenance and/or repairs.

Advantages: The possibility of getting a property below market value is the major advantage of a short sale. There's no telling what sales price a bank will ultimately approve, so there is the possibility of getting a great deal. Another advantage is that you, as a buyer, can choose which contract and addenda to use. Unlike in a bank-owned property, you are still executing a contract with an individual seller, so you set the terms you want.

2.) Bank-Owned a.k.a. Foreclosure

Definition: Occurs when a bank actually takes ownership of a property and lists it with a Realtor.

Disadvantages: The major disadvantage of buying a bank-owned property is the "As-Is" provision. Banks sell properties "as-is" and will not make any repairs or warranty the property in any way. Since the previous owners likely left against their will, bank-owned homes are typically not in the best shape. Additionally, banks are very strict with the purchase contract. You must use the bank's form and accept all of the bank's terms.

Advantages: Just like with a short sale, there is the possibility of getting a great deal. However, because the bank already owns the property, you do not have to wait to find out if the contract is accepted. In most cases, you submit your offer and hear back from the bank within 48 hours.

The bottom line with both bank-owned properties and short sales is the possibility of buying a home for less than market value. However, both transactions come with increased risk. Either way, it's best to speak with your Realtor about whether either option might be right for you.