When you are considering buying a home, it pays to do a little research on how to get the best prices. It won’t take more than a few seconds of research to learn that buying short sales and foreclosures can be a valuable strategy to get more home for less money. So what is the difference?

The difference between a short sale and a foreclosure in a nutshell is:

• Who owns the property
• How far along it is in default

A home that is on the market as a short sale is still under the control of the owner, who is attempting to sell the home for less than the amount of the loan balance.

So let’s say the buyer owes $350,000, but the market price for a similar home in his neighborhood (called a “comparable”) is around $200,000. There is no way to sell the home at market value without the bank taking a loss on the loan. This is why it’s called a “short sale”–because it is being sold for a sum that is “short” of the total amount owed. It is a “pre-foreclosure” property because it has not yet been foreclosed by the bank.

A foreclosure, on the other hand, is a property that has already been repossessed by the bank. Also called “bank owned” or “real estate owned” (REO), when you buy a foreclosure, you are negotiating with a bank, not a private party.

Which should I buy?

There is a significant difference between buying a short sale vs. buying a foreclosure. Some great deals are available either way, sometimes as much as 50% off the peak value of the home, but you need to understand a little about how the system works in order to decide which is right for you.

Buying a Short Sale

Buying a short sale means making an offer to the owner, who is the one listing the home for sale, then submitting that offer to the owner’s bank for their approval. Since they are the ones being asked to take a loss on the loan (actually, they may take less than the amount owed and still make a profit, but that is a topic for another article), they essentially need to tell the owner “yes, we’ll accept this offer.”

This is where the deal can get tough. Let’s say you’ve found the perfect piece of real estate, but it’s a short sale. You make an offer, and the owner accepts your offer. His agent then submits your offer to the owner’s bank, who sends it to a short sale negotiator who represents the bank’s interests. This negotiator is often an hourly employee who has no stake in seeing the deal go through.

It is not uncommon for short sales to take from two to 12 months to complete. Months can go by without hearing from the bank at all, and if the owner’s agent is not good at calling the right person in the bureaucracy, the offer can languish with no action until your patience is worn out and you move on to another home.

On the other hand, if the selling agent is familiar with short sales enough to know who to call at the bank and when, the process can go fairly smoothly. I recently made an offer on a home in November 2010, and it closed escrow in late February, so deals can get done. Just be prepared for delays and some extra work on the part of the agents.

Buying a Foreclosure

Buying a foreclosure is usually a much easier process than buying a short sale. That doesn’t mean you should ignore homes for sale that are short sales; if you find your dream home and it is a short sale, it may be better to accept the challenges of that type of transaction.

However, all things being equal, a foreclosure will be much easier to buy for the following reasons:

• The bank already owns the property and does not want to. In a short sale, they don’t yet own it, and are hoping the owner will just keep making their payments.
• The bank is incentivized to ignore short sale offers, because the government offers the banks subsidies for foreclosed homes that are not available to short sale homes.
• While a short sale negotiator is typically an hourly employee with no direct stake in getting the deal closed, a listing broker for a foreclosed property does get a commission. They therefore have an incentive to see the deal through to the end.
• The price is usually discounted aggressively to sell. Although it may seem like it lately, banks aren’t in the business of owning real estate, they just want to make a loan using the home as collateral.
• Since there are fewer bureaucratic decision-makers involved, the process can often take as little as three weeks from offer to closing.

What’s important to you?

Making a decision on whether to buy foreclosures or short sales comes down to analyzing what’s important to you. Foreclosures will generally be easier to buy than short sales, but limiting yourself to foreclosures may mean you are overlooking your dream home if it’s a short sale. After searching for listings that matched our family’s needs, we ended up finding our dream home, but it was a short sale. If having a quick and easy experience is your priority, buying foreclosures may be the best move in your case.

Kevin Harper is a web developer and author specializing in real estate websites and real estate SEO. He covers real estate related topics all over the U.S., from Cincinnati real estate to Asheville foreclosures, and everything in between.

A lot of people talk about buying foreclosures when they consider the investment opportunities in the current market, but many are thinking of it only as an opportunity to buy undervalued real estate to turn around and sell it at a higher price. But there is another real estate investment option that sometimes goes under the radar. It’s the rental market.

What do foreclosures have to do with rentals? A lot, actually, according to one San Jose property management company. But let’s narrow it down to two major points here: Purchase price and rental price.

Foreclosures affect purchase prices

First, foreclosures affect the price of homes, which affects the investment potential of those homes. If you can’t acquire a property at below market value, you will have a hard time maintaining a positive cash flow on the property as income property. The idea behind income property investing is to build up a portfolio of properties that produce a positive cash flow, adding cash to your bottom line each month. Properties that don’t do this are called “alligators” and will eat your balance sheet for lunch.

Foreclosures affect rental prices

Second, foreclosures affect the rental market dramatically by putting former homeowners out into marketplace to create demand for rental properties. When there are a higher number of potential renters compared to the number of available properties to rent, the price is going to either go up or remain stable. This can help ensure a stable cash flow for the investment property.

These factors combine to create a powerful affect on cash flow for smart investors. When properties are acquired for a portfolio at below market prices and put under professional property management to keep costs down and cash flow high, investors are sure to obtain a higher ROI.

Because of the affect foreclosures have had on these two real estate investment factors (purchase price and rental price ) savvy investors are coming out of the woodwork to participate in the foreclosure investment opportunities that abound. In fact, few rental markets in the country are suffering, and that’s because more people than ever are being forced to rent.

One Colorado Springs property management firm is saying that vacancy rates have decreased significantly in 2010 over 2009 rates. This is good news for real estate investors who are interested in purchasing Colorado Springs rentals as the market is seeking to correct itself from the peak experienced in 2006.

Kevin Harper is a real estate web developer and web copywriter specializing in covering local areas and topics relevant to the United States and Canadian real estate market. He also writes real estate press releases and articles related to Minneapolis Condos and Marco Island Condos.