Buying a short sale vs. foreclosure: What’s the difference?

Buying a distressed property can be a way to secure a home at a below-market price, but it also involves additional steps and risks. If you're weighing a short sale vs. foreclosure, know that each follows a different process, timeline, and level of complexity. Learn how they compare, what to expect as a buyer, and how Rocket Mortgage can help you finance these properties. Explore what counts as a distressed property. 

How short sales and foreclosures differ

The key differences between a short sale in real estate vs. foreclosure boil down to who owns the property and who makes the final decisions during the transaction.

Short sales

A short sale is when a lender agrees to let the homeowner sell their property for less than they owe on their mortgage. The lender must approve the sale and, in exchange, they typically agree to excuse the remainder of the borrower's debt.

Homeowners pursue this option when they can’t continue to make mortgage payments as an alternative to foreclosure.

While the seller gives up the home, they do so with less damage to their credit.

For savvy buyers, a short sale can be an opportunity to buy a home in relatively good condition at a low price.

Foreclosures

A foreclosure is when the lender claims legal ownership of the property after the borrower fails to make their mortgage payments.

Foreclosed homes usually are sold at auction or as real estate owned (REO) properties – sometimes for less than fair market value. Foreclosed homes are usually sold as is, so buyers assume responsibility for the often-significant repairs required to make the home livable.

The short-sale process

One major difference between a short sale and a standard home purchase is the timeline. Expect a short sale to take a long time – sometimes up to a year. However, not every short sale is prolonged.

Short sales often occur when a homeowner is at risk of facing foreclosure. They also may have an underwater mortgage, meaning they owe more on the home than it's worth.

Your real estate agent can make an offer and work directly with the homeowner’s agent to come to a deal. However, the lender must review and approve any sale.

While the timeline is typically longer and each step can be more complicated than with a traditional home sale, a short sale otherwise follows the typical real estate process. You'll make offers, field counteroffers, secure financing, and receive the home inspection results before closing.

Pros and cons of buying at a short sale

Here's what to expect when buying a home at a short sale.

Short sale pros

Advantages to buying a home at a short sale include:

• Potentially lower price. Short-sale properties often are sold at below market value, so you could negotiate a great deal.
• Less competition. Unlike foreclosures or the retail real estate market, short sales tend to attract few buyers due to the added hassles and time required.
• Home inspections are possible. Unlike foreclosures, you may be able to arrange a home inspection before closing.
• The home may be in good condition. While foreclosed properties may be neglected or damaged, short-sale properties are often still occupied by the owner and may be in good condition.

Short sale cons

As with any potentially great deal, there are downsides:

• Long process. Ironically, short sales typically take longer to close than traditional sales. Lender approval of the sale can add months to the transaction.
• As-is condition. Just like foreclosed properties, short-sale properties often are sold in as-is condition. This means they can come with many repairs needed.
• There may be unpaid debts on the property. If the seller was unable to keep up with their mortgage payments, there may be unpaid property taxes or homeowners association fees to cover. A title search should uncover these debts.
• Cash is king. Lenders are more likely to approve sales where the buyer offers cash or a large down payment.

Where to find short-sale properties for sale

The best way to find short-sale properties is through a real estate agent who specializes in them. If you already have a real estate agent, they can look up active short sales on the multiple listing service (MLS).

Compare prices, but also carefully consider the condition. When you find a property you're interested in buying, have your agent reach out to the owner or their agent, just as you would with any other real estate transaction. The difference here is patience. Make sure you’re prepared for a long process.

The foreclosure process

A foreclosure sale can take longer than a short sale. It begins after the property owner misses months of mortgage payments. The lender then issues notices and, after some time, takes legal action to repossess the property.

Once the homeowner has vacated and the bank has legal possession of the property, it either lists it for sale or auctions it.

If you’re a buyer considering purchasing a foreclosed property, it’s helpful to work with a real estate agent with experience in these negotiations.

Pros and cons of buying a foreclosure

Buying a house that has been foreclosed on can come with a lower price tag, but it can also involve potential risks and hurdles.

Foreclosure pros

Buying a foreclosure property can be a good investment. Here are three potential advantages:

• Lower purchase price. Often, the biggest draw of a foreclosure sale or auction is that you may be able to buy a home for less than market value.
• Potential bargaining power. Banks are looking to lend and invest rather than hold property. This can be used to your advantage in negotiations.
• Potential investment opportunity. If you can get a distressed property cheap enough, or do a lot of repairs and renovations yourself, you could come away with a profitable rental property or flip the house for a profit.

Foreclosure cons

Foreclosure sales come with risks to look out for, including the following:

• Unknown condition. Most foreclosures are sold as is. You may not have the opportunity to conduct a home inspection before buying. That means you could end up buying a lot of expensive problems that negate the lower price.
• Competition. At auctions or in sales, you’re often bidding against other aggressive buyers. You may need to make quick financial decisions with little information.
• Financing can be difficult. Lenders may prefer cash sales – especially when selling at auction. Financing for REOs is usually allowed, but the condition of the property may cause problems depending on which loan type you're using.
• Potential liens and encumbrances. If the previous owner didn't pay property taxes or other bills, the property may have liens or encumbrances that need to be cleared before you can close.

Where to find foreclosed properties for sale

To find listings of foreclosed properties, you can search bank websites, government programs, and dedicated listing services and websites. A few good places to start are Fannie Mae’s HomePath and Freddie Mac’s HomeSteps sites.

When comparing foreclosed properties, don’t just look at the price. Try to get a sense of the property’s condition, any financing requirements, and other factors that could make a property more or less desirable. Reach out to the listing agent with prepared questions about the property you’re interested in.

FAQ

Here are answers to some frequently asked questions about buying a distressed property.

How long does a foreclosure or short-sale process take?

Once the foreclosure has begun, it can take months or even years to sell the house. The short-sale process from start to finish can take anywhere from 4 – 6 months, possibly longer, depending on the situation.

Which is better for a home buyer: short sale or foreclosure?

Short-sale homes are typically in better condition than foreclosed homes. Although you can save more money on the home price by buying a foreclosed home. Be sure to consult with your real estate agent when thinking about buying a short sale vs. a foreclosure.

Does buying a short sale or foreclosure home hurt my credit?

Going through a short sale or foreclosure can affect the homeowner’s credit score and credit report as a whole, but buying one of these homes doesn’t hurt your credit.

Are short sales and foreclosures good investment opportunities?

If you have the money to cover the cost of the home and repairs, you could make a large profit by purchasing a short sale or foreclosed home and reselling it.

The bottom line: Do your research before buying a short sale or a foreclosure

Purchasing a financially distressed property can be a way to secure a home well below market value, but you'll need to be prepared. Short sales allow for professional home inspections and typically better property conditions, though you must be patient navigating long lender approval timelines. On the other hand, foreclosures may offer steeper financial discounts but come with the inherent risk of hidden damages and fierce buyer competition.

If you are ready to find a great deal and explore your financing options, start your mortgage application with Rocket Mortgage today.