In short, a short sale is preferable to a foreclosure – even though you may pay a bit more than you would at auction. Here are a few tips for finding the best deals when you opt to purchase a short sale property.

1. Use a realtor
Although a short sale can seem like a great deal, there may be reasons that you don’t want to buy. A real estate agent can uncover this information for you. For example, they can find out if the property is going into foreclosure, too many liens against the property etc.
You also need to know if there is a second mortgage on the home since, even if the homeowner and the original lender sign off on the sale, you may have to deal with the secondary lender as well. It pays to make sure your agent has experience with short sales to ensure that you don’t get the short end of the stick.

2. Don’t buy “as is”
Many homeowners offering short sales do so with an “as is” caveat. Don’t buy into a situation where damage and pre-existing problems become your sole responsibility, as your “cheap” property could be turn into a money pit.
Banks may be open to reducing the price if there is significant damage to the home. Have a contractor look at the property and give you an estimate to forward to the bank. Bring your insurance agent out to make sure the home is insurable. You shouldn’t purchase a property if the seller won’t let you have it inspected.

3. Be prepared to wait
Buying a home that is close to foreclosure in a market in which home values have dropped significantly is not as easy as you might think. For starters, even if the homeowner accepts your bid, the bank that holds title may not. This could lead to weeks or months of negotiation before you come to common ground.

4. Never give cash
Any seller who asks you for cash or other payment up front is committing fraud. Since a short sale means that you are buying the house for less than what is owed to the bank, the homeowner will come out of the deal with no money. If demands for payment seem fishy, they probably are, so don’t fall prey to this common scheme.

5. Deal with the lender
Once the homeowner agrees to your purchase price and signs off on it, all further dealings will be conducted with the lender. They will also have to approve the terms of your offer and then you will pay them, not the homeowner, for title to the property.

A second-mortgage holder can initiate foreclosure proceedings even if the first mortgage is not behind on payments.

Even though a second mortgage foreclosure will not extinguish the first mortgage lien, this does not prevent the second mortgage lender from exercising its right to foreclose. The second lender can foreclose at any time after the borrower has defaulted on the second mortgage loan. The second mortgage lender does not need to wait for the first mortgage lender to foreclose.

When a second mortgage lender forecloses on the second mortgage loan, this foreclosure process will extinguish all interests in the foreclosure property that are junior to, or later in time than, the second mortgage loan. Therefore, the first mortgage loan will still be attached to the property after foreclosure, but a third or fourth mortgage loan or other lien that attaches after execution of the second mortgage will be extinguished.

The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process.

Try to work out some sort of a payment or settlement arrangement with your lender for the second mortgage. Some 2^nd mortgage lenders will settle for 10%-30% of the loan balance.

So how do you get them to listen? You have to carefully put together your documentation, and make it as easy as possible for the lender to understand. Often times the borrower has had little to no contact with the lender for a very long time. During this time, the loan could have been sold, or servicing rights transferred to another loan servicer. Your loan number will be different with each lender or servicer. These are some of the details that can make it difficult to get a simple conversation going.

Bottom line: Work with someone who knows how to find your second mortgage, and is qualified in negotiating a favorable settlement.