I've just started looking into buying a condo (as a residence, not a rental) and I'm seeing a lot of foreclosures and short sales listed. This will be my first home purchase and I'm just wondering if there is anything I should be aware of (hidden fees, complications, etc) before buying a property like this.
Clara, good question. A good realtor can advise you about the issues to consider in your state, so I would make sure to find a qualified professional to help you in your search.
A short sale has a few risks that are unique. First, because the sale price is less than the outstanding loan amount, your offer must ultimately be accepted by the lending bank, which takes time. The bank may not be prepared to write off a portion of what it considers to be a good loan. Banks have been notoriously slow to respond to offers on short sales, which is why many realtors will recommend that buyers avoid them if there is any time sensitivity. If you see a listing that indicates "short sale approved" then you may find there is less of a delay.
Foreclosures are a different story. On a foreclosed property, the bank has already recognized that the loan is non-performing, has seized the collateral (the home), and is trying to convert the asset to cash while preserving as much value as possible. If you are buying a foreclosure through a realtor, then the issues you may encounter are similar to those in a regular sale. You should review the listing contract terms carefully. A bank may try to limit your ability to inspect the property, and "as-is, where-is" language is commonplace. I have heard of cases where a bank may try to pass along unpaid HOA or CC & R fees to a new buyer. Make sure you read all of the documents connected with the listing, and that you are able to obtain a clean title insurance policy. The title insurance is important to protect you from any claims by creditors after the fact. You should take a look at the http://www.homepath.com website, which shows Fannie Mae's inventory of lender-owned properties. They have programs that favor buyers who intend to occupy their homes as well as first time home buyers. Fannie Mae also will provide financing to qualified buyers. I have not addressed the particular issues you would encounter at a foreclosure auction, which is a horse of a different color. I would avoid auctions if you are buying a home rather than investment property.
In conclusion, a good buyer's broker will help you navigate all these issues and will flag others that I have not mentioned. Best of luck.
As with any investment, there are risks. The condition of property, especially if it has been vacant for a lengthy period of time, can be difficult to easily determine. Major unforeseen repairs could make any discount unpalatable. Do not simply trust an inspection report. If possible take an experienced remodeler through the property.
Consider purchasing owners title insurance, even if it isn't required. This may save you a large headache later if it turns out that there are questions involving clear title for the property. The process for purchasing a short sale may test every ounce of patience you can muster. That said, it also can be very profitable. Here is a field guide from the National Association of Realtors on short sales that you may find helpful: http://www.realtor.org/library/library/fg335 They also have one on foreclosures: http://www.realtor.org/library/library/fg329
Hope that is helpful.
I'll address the question as foreclosure or short sale versus regular house on the corner not in a distressed situation. If a) you can get it at a price below market, and b) the condition of the property is not such that when you add the repair costs and the purchase price together, you're at or above market value, then I think it's a good way to go. It's how we've bought three properties in the past, and we've been very happy with the outcome. To me, the reason is simple - the bank is in business, and the homeowner is not. The homeowner gets an emotional attachment, which triggers a psychological reaction called the endowment effect. Banks don't suffer from such psychological phenomena (there's a joke in there somewhere, isn't there?). You can read more about how the endowment effect affects (have to think about which of those two words goes where) real estate at the link below.