The important thing is to remember that most homeowners wait too long to start investigating their options. It is almost as if they are looking for a reprieve from the lender.  Unfortunately, those in poor financial standing are unlikely to get that reprieve. Therefore, it is to your advantage to understand the facts of short sales ahead of time and begin negotiating with your mortgage lender as early as possible in the process.

Not all homeowners are able to receive assistance from their lender and not all banks are willing to offer it.  If you find yourself in this position, a pre-foreclosure sale at the full price of the mortgage may be the only way to keep your credit in good standing.  Don’t be mislead, a foreclosure will negatively impact your credit score for many years to come.  Some foreclosure lawyers advise their clients declare bankruptcy to stop foreclosure.  This can work in some states but it is also risky and will damage your credit score as well.

If you make the decision to sell your home, either at full price or at a price lower than what you owe (aka a short sale), it is a wise to make arrangements ahead of time with your lender. This is required in the case of a short sale but even if you manage to sell your home for you owe staying in touch with the mortgage lender will help smooth the process. If your lender knows that you are actively trying to sell your home they are more likely to allow you time to close that sale and may assist the sale in other ways. Staying in touch with the lender is something you should do.

As for that sale, it can be handled by you or by a realtor.  If you are upset about the loss of your home, working with a realtor who knows how to work with pre-foreclosure sales and short sales is advised.  Not only might you have difficulty dealing with prospective buyers who seem to have no regard for you or your troubles, you will also want to have someone who knows the process helping you out. If you do end up using the services of a local realtor who understands short sales to assist you with the sale of your home, you may actually receive more money.  This happens because realtors usually sell homes for somewhere at or around their actual assessment value.  Although it may be the case that not much will be left over after paying your mortgage and the realtor, it may be just enough to help you make new living arrangements. Since buying another home likely isn’t an option, you will most likely need to have enough money for a security deposit as well as first and last months rent.

Remember, buyers who’re interested in pre-foreclosure and short sales aren’t always careful with the words they choose.  Believe me, you may have to deal with people who look down on you. This can be an unpleasant situation, to be sure, but it is important to remain calm. Unfortunately, you will find that there are many misconceptions about people who’re facing foreclosure, most of which are not true.  Remember to always keep your head held high.  As painful as it may be to deal with a jerk, at least you can avoid foreclosure and keep your credit in good standing.

The biggest downside to selling your home, a home that you liked well enough to buy in the first place, through a pre-foreclosure or short sale, is the loss of your home. This stark reality is why many homeowners procrastinate until the last minute to begin looking into how to sell their home like this. It is a decision that many homeowners are uncertain and frightened about.  However, you have to know that unless you can get your mortgage back to good standing, you will lose your home regardless of what action or inaction you decide to take.  A pre-foreclosure sale or a short at least helps you retain a decent credit score, especially if your mortgage is paid off in full.

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If the foreclosure process has been handled properly many of the typical problems with buying a foreclosure at the courthouse steps are taken of prior to the home going into a REO inventory. Major banks generally hire a foreclosure property management company to insure that the house is officially vacated by the prior owner and not vandalized by them. This also should prevent you from being caught up in lawsuits brought by delinquent borrowers and having to evict them. One of the first things to check is if the mortgage lender who’s listing the REO property has taken care of these important details. If the home in question is still occupied or in obviously poor condition it’s best to pass on it in most cases. However, it is important to note, that foreclosure property management services do not include a proper home inspection or guarantee against other potential problems.

As with any primary home purchase it is essential that you have the property inspected. Even if you’re buying for investment purposes an inspection may save you thousands of dollars. Many people get caught up in the competition and quite often the novice REO buyer ends up purchasing a money pit. Sometimes REOs are sold at auction where you can’t get a full inspection report ahead of time. In this case, leave the buying to the pros with a lot of cash on hand who can take a loss if the property turns out to be a dud. Don’t bet the farm on an uninspected REO home unless you’re willing and financially able to take the risk.

One thing that you have to consider is that a REO home might have structural issues that led the prior owner to the tough decision of letting it go into foreclosure. For example, some homes in foreclosure in Florida right now have defective Chinese made drywall that will cost thousands of dollars to correct. Other homes might have serious termite damage. Others may have dangerous mold issues. There have been reports of expensive homes built during the housing boom that were so poorly constructed that they’re essentially worthless because they’re falling apart.

Beyond the serious problems, you can expect the REO home to have some damage simply from someone living there and general wear and tear. You should budget for at least new carpet and new paint in any REO home you buy. You will probably also need to make drywall, hardware and other general minor repairs. Also, it is quite likely that the HVAC system will need maintenance and, if the home is more than a few years old, a new roof.

The bottom line is that you should have cash reserves equal to about 10-15% of the purchase price for repairs. Do not count on credit for these repairs since today it is quite common for banks to refuse equity loans on previously foreclosed properties. Using credit cards or lines of credit for these repairs is also risky in today’s financial climate. In today’s real estate market cash is king.

It is also quite important to make sure that any outstanding liens and back taxes have been resolved. Depending on the state laws, you may be responsible for these items as the buyer of the foreclosed property. You do not want this to come as a surprise to you after the fact. If you don’t know what you’re getting into this could significantly increase the cost of the home, making a great deal into a nightmare. For your own protection you should always consult with a local real estate attorney before buying a foreclosed REO property so that you understand your potential legal liability.

Most banks make a list of REO properties for sale available online or go through a real estate broker or management firm who handles this for them. My recommendation for the novice buyer is to go through a real estate agent who specializes in selling foreclosures and REOs or a REO specialist. While the savvy real estate investor can save money with a do-it-yourself approach the risk to the beginner is quite significant. That’s why it’s best to work with seasoned real estate professionals when buying a REO property.

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