What is Better: A Foreclosure or a Short Sale?

You want to buy a home for less than market value, or do you want to own a second home and are looking for a deal?  There are few active buyers in the real estate market nowadays but those who are seriously looking are considering short sales or foreclosures.  If you are one of these people then what is better for you – a short-sale or a foreclosure?

Is a short-sale best?

Short sale signs are popping up everywhere yet many people do not know what this means.  The seller who chooses a short sale is in a hurry to get out of their mortgage so the lender agrees to accept a mortgage payoff amount that’s less than what’s owed in order to help the seller get out fast.  The lender ultimately forgives the remaining balance of the mortgage loan.

So who’s the winner and who’s the loser with a short sale?  The person selling risks damage to his or her credit report but the damage is not as bad should they foreclose.  Also, the seller will leave their home without so much as a nickel from the sale and this may cause problems looking for another place to call home.

The lender takes a financial loss, but chances are it won’t be as severe should they have to foreclose on the mortgage.

For the buyer, obviously he or she is able to secure the sale at a cheaper price but chances are the house may have a lot of problems to fix – just like those “handyman specials” that pop up once in a while.  Another factor is that there is a lot of paperwork for the purchaser to get through in order to finalize the sale.

foreclosure or short-sale?There are two situations that you must be aware of that are signals that a short sale may fail.  First, lenders very rarely accept a short sale offer until the borrower has fallen far behind in their payments and they have received a notice of default.  Second, if the seller has filed for bankruptcy, then avoid this short sale like the plague.  Negotiating a short sale once bankruptcy has been filed is a collection activity and collection activities are prohibited in bankruptcies.

If you are willing to accept a lot of red tape and hassles in order to receive a substantial discount then this may be worth your while.  Another benefit to consider is that the lender wants to continue to get paid the money it loaned, and this may open a door to some beneficial financing terms.

Now that we’ve looked at short sales, is purchasing a foreclosure better?

First of all, if title insurance is available on the foreclosed home, then most financial experts say it is safe to buy.  This is essential because so long as there is title insurance then the purchaser is protected from the former owner coming back to seize the home back.  (This has occurred when a lender has repossessed wrongfully.)

If a purchaser searches for foreclosures from a bank, the term for this type of home is an REO (real-estate owned by a bank). There are specialized real estate agents who deal strictly with REO properties and there is no shortage of these homes. This is good news for home purchasers.

Finding an REO property follows the simple common sense rule as everything else in life – buyer beware. Many of these homes fell into foreclosure months before they return to the market so many of them are in a decrepit state.  Once a home has been empty for months, it can fall into such a bad condition that it no longer qualifies for a mortgage.  This renders these homes to investors who can purchase them with cash, fix them up and sell them.

To sum up buying a foreclosed home, if you are not an investor, and do not have cash, then purchasing an REO property must be one that can be mortgaged.

Either a short sale or a foreclosed home can be an amazing deal for the right purchaserBe sure to do your homework first when looking at a home in order to facilitate the process as smooth as possible.

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Published or updated December 6, 2012.


  1. We purchased a foreclosure last year, and I will say the results are mixed. We got a very good deal on it, and while it needed some large ticket things like a new HVAC system…we were aware of that going in. One thing we had a huge problem with, which we didnt know going in, was that the house was infested with BED BUGS. Apparently they can live in a property for quite a long time without feeding. So after a few months in the house, they found us and started feeding and multiplying. Added cost we were not expecting $2500, plus HUGE amount of hassle.

    But all in all I like our foreclosure.

    • Yes, that sounds like a huge problem! Not roof caving in problem but major ick!

      I think all houses have their warts that you don’t know about; doesn’t matter if it’s a foreclosure, short sale, or regular sale. We’ve had things creep up that we needed to take care of.

      Glad you are happy overall with your home and you got rid of the bed bug problem.

  2. Bed bugs would give me the creeps. You really have to be careful when dealing with financially distressed properties and plan to spend some money to get the place back into living condition. I have seen some fairly bad foreclosures while shopping for property and ended up going with a short sale that is now a rental.

    • You can also find people who feel like they need to lash out on the house for their frustrations, causing costly damage.

  3. trolling for a deal has its shortcomings. If I were in the market, I would go with the short sale, The house would be in better condition and more than likely go faster than an foreclosed property.

  4. Jenna, Adaptu Community Manager says:

    I think keeping all your options open is the best bet, I’ve been looking for short sale and foreclosures for awhile. It’s just the matter of find the right home for you. But if your in a time crunch then you might want to steer clear, short sales take a LONG time.

  5. You definitely have to weigh the pros and cons and determine if a short sale is what is right for you. If you have the time, energy and money to put forth then I say go for it. ESPECIALLY if it saves you money in the long run. These are some great tips!!

  6. May I respectfully add a clarification? You stated that in a short sale the lender forgives the balance of the mortgage not covered in the sale. That’s only true in some states. Other states allow the lender to get a deficiency judgment for the remaining balance. And the expectation of whether a lender will forgive a remaining balance can have a big effect on negotiations with a seller.

    I also suggest potential short sale buyers research other lien holders. A deal can go sour if the first mortgage lender agrees to a short sale but the second and third mortgage lenders do not.

    It’s a really stressful and complicated way to buy a house. And not for the faint of heart. I recently advised potential short sale buyers to find a real estate agent with the calmness of the Dalai Lama and the agressiveness of Attila the Hun. 🙂

  7. Elaine Garber says:

    Hi Glen, we have had our house on the market for 9 months now. We had 3 contracts and all 3 times they have backed out. We can’t understand why, it’s in a good neighborhood, we had to put a new roof on and other things so it could be approved by fha. We put new windows, carpet and flooring 3 years ago and did some painting. Our realtor knows we are getting desperate but we can’t understand why everyone is backing out. Please help!

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