You’ve decided that now is the time to buy a property because your finances and life are in shape. But you’re hearing all these terms in the news and confusing information here and there on foreclosures, short sales, etc. and you don’t really know where to start. Fortunately, it's not as complicated as you think, but to make sure you understand the facts, let’s explore the process, what those terms mean, and which ones you should target for your first home.
First of all, you need to understand that the vast majority of property sales in urban areas are conducted through state licensed real estate sales professionals and the local realtors’ association. The realtors’ association typically has a computer database, commonly called the multiple listing service (MLS), which is a listing of all properties listed with a broker in the association. So the MLS is where you want to shop for property and when buying a property, you need to select a licensed real estate broker to work with.
Interview a few sales professionals, call references, check their licenses, and find a competent professional to help you in your search. You can also use online resources like Zillow and Trulia to supplement your search for properties, most of those are also listed on the MLS. Now usually the buyer does not pay any money to the sales professional, it is paid by the seller when the sale closes, so you don’t need to be concerned about that issue (Note: if your agent asks you to sign some agreement like committing to use them for the purchase, that may be fine, but make sure you read, understand, and agree to what you are signing).
So you have a clear picture of where to look for properties, here are the different types of sales that can occur.
MLS listed properties. These are the properties that are listed as traditional sales, bank owned REO (commonly improperly called foreclosures), and short sales. Traditional sales are when an individual seller lists their property for sale with a listing agent on the MLS. Bank REO is “real estate owned” by the bank because they have already foreclosed upon the properties when the owner stopped paying their mortgage. There are also short sales, whereby the property mortgage balance is higher than the current value of the property, but the owner wants or needs to sell. The owner then applies to the bank and if the bank agrees the property will be sold and the bank will accept a payoff on the mortgage that is short of the outstanding balance owed, or “short sale”.
Since all of these are listed on the MLS, as a buyer you can typically extend an offer upon a property you want, get a 10 to 17 day due diligence study period, have a home inspection done, review title information, get financing in place, obtain homeowners insurance, etc. This is the best way to go, buying a property publicly listed on the MLS via a real estate sales professional. If you did your homework and selected an experienced agent, their knowledge and advice should help guide you to make a good property purchase. Of course you also should educate yourself separately from them by talking to other experienced real estate owners and/or reading up and taking a class or two if you can. The sales person ultimately earns their living by selling, so you should trust and take their advice, but you also should get independent neutral and unbiased information on your own.
Foreclosures at the courthouse. These are properties where the seller stopped paying the mortgage and the bank has initialed the foreclosure process to seize the collateral, the property, and take back ownership. It is not a good idea for people to try to buy these properties at the courthouse unless they are experienced investors and willing to take huge risks in buying real estate. There are just too many things that can go wrong and the amount of money is way too much for an average person to risk. There could be title issues, liens, the property could be a wreck, the owners could wreck it, or you don’t have homeowners insurance on it, etc. It is best to leave these for the risk taking investors who assuredly have already learned many a hard lesson trying to buy foreclosures at the courthouse.
For sale by owner (FSBO). You may find a FSBO that is appealing. But they make up a very small percentage of properties for sale, like maybe 1 to 5% of the available inventory in any general metropolitan area. Therefore, keep your eyes open if you see one, but spend your time, energy, and effort shopping where all the properties are listed — the local MLS. If you do find a FSBO you like, make sure to get adequate legal representation to make sure you are properly transacting the sale. This is because real estate sales are complicated and you don’t want to miss some important item that will cost you money down the road.
Hopefully that clears up the different types of sales that can occur. We don’t suggest trying anything outside the normal MLS purchasing process. Experienced buyers have learned the hard way — when talking about real estate, if it sounds too good to be true, it always is too good to be true. The best way to buy property is via a licensed real estate sales professional from MLS listed properties, it has all the inventory of homes for sale and is the lowest risk way to become a homeowner, which is exactly what a first time buyer needs.