4 Types of Foreclosed Properties

Pre-foreclosure or short sale

During pre-foreclosure, the homeowner still has control of the property. They have usually stopped making payments and have (or are looking to) negotiate with the lender to sell the house below market value. This is called a Short Sale.

You can make an offer to purchase the property, but it has to be accepted by both the owner and the lender.

The lender has to agree to let the owner sell the property for less than the amount they have a loan on it for. Selling helps the seller avoid foreclosing, and helps the lender avoid the costs of foreclosing and selling the property as well.

Typically short-sale homes are in better condition than foreclosed properties because it’s occupied and the owner wants to sell to and must keep the property in decent condition to do so.

If you buy a foreclosure, it’s in as-is condition. Typically, the lender nor the owner will make repairs. You will still do a home inspection for your protection, and can still pull out or renegotiate the price – if the repairs are too costly.

Auction sale

Homes don’t always sell during the pre-foreclosure stage. This happens a lot when the lender is simply not willing to accept a lower amount for the home, or the owner is unrealistic in their ability to save the home. At this point; the home goes into foreclosure and is sold at auction.

Auctions are typically conducted by a neutral third party such as a trustee or sheriff. During this stage, the lender cannot take advantage of the property owner in any way, nor can the lender make a profit at the auction.

When the property is sold to the highest bidder, the liens are paid and any overage is given to the homeowner. In most cases though, there is no money left over to go to the homeowner.

Auctions are usually cash only, which tends to limit the number of people who are able to bid on the property at the auction sale. If you want to see how one works, look them up in your area and visit to see if it’s something that would work for you. This is the riskiest of all stages to purchase because you usually can’t inspect the inside of the property, or perform an inspection before bidding on it.

NOTE: Be sure to investigate the right of redemption laws in your state, which allow homeowners to reclaim their property within a certain period of time if they pay all past-due amounts and applicable fees. These vary from state-to-state.

You will also want to have a clear understanding of any liens or encumbrances on the home. Make sure there are no surprise claims pending against the home that you may have to deal with after the auction.

Real Estate Owned (REO)

If the property fails to sell at auction it will move into the full possession of the lender and become real estate owned. REO is the most popular method of buying a foreclosure because it’s generally the easiest and safest way.

However, when you purchase a lender-owned property, it can offer the least value and most competition. Keep in mind that the lender acquired the property because no one would bid higher than the amount that was defaulted on.

Generally, lenders want to move this distressed asset off their books immediately and will price to reflect the market value of the property. For the buyer, that means that there will likely be little room for negotiation.

The benefit here is that the lender is usually obligated to clear any additional liens on the property, including back-taxes, so it’s a much safer investment than an auction. Commonly the lender’s agent will also clear and clean the house for sale.


This tends to be a slower process and involves more paperwork than other types of foreclosure transactions.

Buying properties from the Federal Housing Administration (FHA),
U.S. Department of Veterans Affairs (VA), Small Business Administration (SBA), Fannie Mae, Freddie Mac, Internal Revenue Service (IRS), or others can save you money. Some of these agencies may assist with financing, but the IRS requires full cash payment for the property.