Which to Buy: Short Sale or Foreclosure?

In this buyer's market, some homebuyers ask themselves: Will purchasing a short sale or foreclosure end in disaster -- or yield a jackpot?

And which type is best to go all-in with: a short sale or foreclosure?

"There's really no cut-and-dry answer," says Gwen Daubenmeyer, a certified distressed property expert with Re/Max in the Hills in the Detroit area. "It really depends on the buyer and what the buyer's priorities are."

Before starting their search, homebuyers who want to play their cards right should know the benefits and drawbacks of buying either type of "distressed" property: foreclosures and short sales.

According to Lender Processing Services, nearly 2.2 million homes in the U.S. were in foreclosure in April. On average, they sell for about 30 percent less than a nondistressed property, Daubenmeyer says.

In April, the median price of a move-in ready foreclosure was $185,000, according to Re/Max. A nondistressed property's median price was about $267,300.

Such deals are possible because homebuyers can negotiate closing costs and price in foreclosure sales, says Elaine Zimmermann, a real estate investor in Memphis, Tenn. Buying a foreclosure typically is faster than buying a short sale, and an investor can buy a home for rock-bottom dollar. The national average of a foreclosure that needs some work may cost around $107,600, according to Re/Max. The investor could rent out the home or resell it after fixing it up.

Investors should expect to spend no more than 5 percent to 10 percent of the purchase price to renovate a foreclosed house, Zimmermann says. "Your time and trouble are worth something, and your energy," she says. "You should come out ahead."

Are you sold on the idea of buying a foreclosure? Not so fast. Proceed with caution because there's potentially a cost to that low price: a damaged house.

David Richardson, an inspector in the Detroit area who's certified by the American Society of Home Inspectors, says he has seen his share of ransacked homes. As a buyer, you could encounter scarred walls, carpets or appliances that were damaged by the former owner, he says.

Sometimes, time and neglect are the culprits. Turned-off utilities coupled with the house sitting empty for months can do a good share of harm.

However, he says, some foreclosures are "immaculate." And if you scope out a property that's run down, there's still hope.

"If a person is handy, and you have a high tolerance for defects and you can fix this stuff, there are just a ton of opportunities out there," Richardson says.

But in some foreclosures, the condition of the home may be the least of your worries.

If you buy a foreclosure at auction sans research, you won't get to take a peek to see if the plumbing works, if the walls are cracked -- or if there's a lien against the property. You'll be responsible for these cosmetic and legal issues, so many investors research the property's history before the auction. Usually, savvy investors take on these types of sales.

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