Buying a Short Sale vs Foreclosure: What’s the Difference and Which is Better for You?

Key take aways: 

• Short sales often have better conditions and more negotiation but take longer to close.
• Foreclosures are usually cheaper and faster but sold “as-is.”
• Pick based on priorities – condition and flexibility vs. speed and price.

You’re scrolling house listings in Seattle or higher priced properties in Los Angeles, when you spot your dream home priced below market value. It seems like a rare opportunity, but there’s a catch: is it a short sale or a foreclosure? 

So, what’s the difference? In simple terms:

• Short sale: The homeowner sells the property for less than they owe, with lender approval.
• Foreclosure: The bank takes ownership after the homeowner defaults and sells the home directly.

Understanding these differences is crucial before making an offer. In this Redfin article, we’ll break down the process, pros and cons, and help you decide which option might be right for your buying strategy.

What is a short sale?

A short sale happens when a homeowner sells their property for less than the remaining balance on their mortgage, with the lender’s approval. This usually occurs when the homeowner is in financial distress (unable to keep up with mortgage payments) but wants to avoid foreclosure. Because the sale involves the lender agreeing to accept less than what is owed, the process can take longer than a typical home sale.

What buyers should know about short sales before making an offer:

1. Lender approval is required: The bank must approve the sale, so expect a longer timeline than a typical home purchase.
2. Financials matter: Buyers should be prepared for potential delays while the lender reviews the homeowner’s financial documents.
3. Condition is often better than foreclosures: Because the owner may still live in the home, it’s usually maintained more carefully.
4. Less competition, but be patient: Short sales often attract fewer buyers than foreclosures, but the process can take weeks or months to finalize.
5. Opportunity to negotiate: Buyers may have some leverage to negotiate terms or contingencies with the lender, making it a chance to get a favorable deal.

What is a foreclosure?

A foreclosure happens when a homeowner fails to keep up with mortgage payments, and the lender takes ownership of the property. The home is then sold by the bank, usually to recover the outstanding loan balance.

What buyers should know about foreclosures before making an offer:

1. Bank-owned property: The lender owns the home, so the previous homeowner is no longer involved.
2. Sold “as-is”: Foreclosures are often sold without repairs, so buyers should be prepared for potential maintenance or renovation costs.
3. Faster timeline, higher competition: Once listed, foreclosures can move quickly, but investors often compete aggressively for these properties.
4. Below-market pricing: Foreclosures are often priced lower than comparable homes, sometimes offering significant discounts, but buyers should weigh the condition and repair costs.

Short sale vs. foreclosure: How the buying process compares

Short sale vs foreclosure pros and cons 

Short sale pros:

• Potentially less competition: Fewer buyers typically pursue short sales compared to foreclosures or traditional listings.
• Better home condition: Owners may maintain the property to protect their credit, keeping it in livable shape.
• Opportunity to negotiate: Buyers can sometimes negotiate price, contingencies, or minor repairs with lender approval.
• Price point advantage: Motivated sellers may accept offers below market value to sell quickly.
• Utilities and basic maintenance: Sellers often keep utilities on and handle basic upkeep, reducing immediate costs for buyers.

Short sale cons:

• Lengthy approval process: Lender approval can take weeks or months, delaying the closing.
• No guarantee of approval: Even if the homeowner accepts your offer, the bank may reject it.
• Complex paperwork: Multiple liens or debts may need to be resolved before the sale can close.
• Property risk: Deferred maintenance or hidden issues may exist due to the owner’s financial struggles.
• Buyer effort required: Buyers must stay in frequent contact with agents and lenders, provide documentation, and follow up consistently.

Foreclosure pros:

• Faster transaction: Since the bank owns the property, foreclosures often move more quickly once listed.
• Below-market pricing: Foreclosures are usually priced lower than comparable homes, offering potential value for buyers.
• Motivated seller: Banks want to sell quickly, giving buyers a more straightforward path to closing.
• Clean title: Foreclosures typically come with cleared liens or back taxes handled by the lender, reducing legal complications for buyers.
• Opportunity for investors or renovations: Buyers willing to invest time or cash into repairs can get a good deal and potentially increase property value.

Foreclosure cons:

• Sold “as-is”: Foreclosed homes usually come without repairs, so buyers should budget for maintenance or renovations.
• Property conditions may be poor: Homes may have been neglected or abandoned, requiring significant work.
• High competition: Investors and cash buyers often compete aggressively, making offers more competitive.
• Cash or strong financing preferred: Lenders often favor buyers with cash or pre-approved financing, which can limit options for some buyers.
• Limited negotiation: Banks may be less flexible on price or contingencies compared to a short sale, especially if multiple buyers are interested.

Which is better for buyers?

Deciding between a short sale and a foreclosure depends on what matters most to you as a buyer.

• Looking for a home in good condition? Short sales often offer properties that are better maintained, since the homeowner is still living there.
• Want a quicker transaction? Foreclosures typically move faster once listed, as the bank owns the property and wants to sell quickly.
• Prioritizing negotiation room? Short sales give buyers more leverage to negotiate price, contingencies, and other terms with the lender.
• Focusing on price savings? Foreclosures may be priced lower than comparable short-sale homes, offering potential value for buyers willing to handle repairs.

The bottom line is short sales are often better for buyers who value condition and flexibility, while foreclosures may suit those seeking speed and lower prices.

Pro tip: Work with a real estate agent experienced in distressed properties to navigate either option successfully. They can guide you through lender requirements, paperwork, and potential pitfalls.

FAQs Foreclosure vs short sale

1. Can I get a mortgage for a foreclosure or short sale?

Yes, standard loans apply, though some lenders may require more documentation for short sales.

2. Are short sales cheaper than foreclosures?

It depends. Foreclosures often sell below market value, but short sales may allow negotiation.

3. How long does a short sale take?

Typically 2–6 months, depending on lender response.

4. Can I negotiate repairs in a foreclosure?

Rarely. Most are sold “as-is,” but some lenders may offer credits.

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