During your home search you may have noticed two types of homes for sale with prices much lower than market value.  You may have asked yourself, what makes these homes different?  

It can be confusing when you see these amazing prices on certain homes when others that are similar are much more expensive.  The reason for these drastic differences are due to foreclosures and short sales.  

We're breaking down the differences between the two so you can better understand your purchasing options...

Foreclosures 

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

The main difference between a foreclosure and a short sale is in who is selling the property.  Foreclosures happen when the bank takes a property from the borrower that has not paid their monthly mortgage payments for a given amount of time and attempts to sell it to satisfy the outstanding loan amount. 

Typically, foreclosures are sold auction however, they can also be sold in a traditional manner.  

Buyers have the ability to purchase homes under foreclosure however the process is not a simple one.  Whether it be at auction (which requires cash offers) or purchased through the traditional method of submitting an offer, there is no guarantee a buyer will secure the home.  If more than one buyer has submitted an offer, the highest and most qualified offer will most likely win.  There is also no guarantee that a bank won't reject multiple offers as well.

Short Sales

A short sale is a home that is available at a purchase price that is less than the amount owed by its current owner.

A short sale transaction benefits the bank by allowing it to avoid repossessing the home in foreclosure, which is expensive and time-consuming. The seller avoids the credit hit that comes with foreclosure and the bankruptcy that sometimes accompanies it.

When purchasing a short sale property, it often times becomes a waiting game.  Waiting for an answer on a short sale can be frustrating as banks often take a longer amount of time to decide if they will accept the offer (anywhere from 6 months or more).  Short sales are beneficial for those looking to purchase a home at a good price with no strict timeline in place.

Sources: Investopedia, Forbes, Realtor.com