We have sign outside of our office that says, "Free foreclosure list!" It works like a charm.

I notice that people come in and say, "I would like a free foreclosure-and-short-sale-list, please." We start talking and I realize that 90% of the general public does not know the difference between these two animals - they just want a bargain and think that foreclosure-and-short-sales are the way to get one.

A little foreclosure and short sale 101, OK?

A foreclosure is easy to understand. Somebody bought a house and got a mortgage to do so and then couldn't make their payments so the bank took the house back and is now selling it. We call these REO properties.

Short sales are a different breed. A short sale means that the seller needs to sell the house, but it's worth less than the pay-off on the mortgage. Now we need to find a buyer, get an offer, and then convince the bank to accept less then was agreed upon when the seller bought the house. Short sales get complicated - the banks are not equipped or inclined to give us an answer in any reasonable amount of time. The seller has to "qualify" for the short sale almost like when they bought the house. The bank wants them to prove that they can't make up the difference between the sales price and the mortgage balance.

Since a seller walks away from a short sale with, uh, nothing, and the buyer has to be incredibly patient waiting for the bank to make up their minds, tempers can run high.

Since a seller makes no money on a short sale, why do they bother? Why not just walk away? 2 reasons: most people are honorable and want to live up to their obligations as best they can. Also, a short sale affects a seller's credit for 2 to 3 years, while a foreclosure will ding it for 5 to 7 years.

What's in it for the buyer? Foreclosures and short sales are quite often priced below the "normal" competition.

What are the drawbacks? A buyer is getting involved with a house where the last owner was probably pretty mad when they left. Usually, there aren't any appliances or window coverings or light fixtures, they're often dirty, and the landscaping is suffering or dead because nobody cares. Sometimes the last owner deliberately trashed the place, kicking holes in the walls and taking a drill to the plumbing and a hammer to the tiles. (Shame on them! It isn't the poor house's fault.)

The other drawback on an REO is that the bank has no idea of the condition of the property. The buyer gets no disclosures, no warranties, and no promises - they're on their own as far as figuring out what kind of shape this house is in. (I would never sell one of these properties without a thorough ASHI certified inspector going over it first. Never!)

So if you think that you might be interested in picking up one of
these "bargains," please call a REALTOR(R) who is experienced in dealing with them. Remember, these properties are tricksy and difficult and require a competent professional.

If you're a homeowner that's afraid that you might be in one of these situations, again, call a REALTOR(R) who knows what they're doing. There are a lot of scams out there and a lot of unscrupulous bottom-feeders that want to take advantage of people's fear and desperation. Don't deal with a "loan modification facilitator" if they want money up front. Reputable loan modifiers will wait until the job is done to collect a fee. They're one of the few professions that I can think of that get paid like REALTORS(R).