To put it real simply, bank owned property has been through the foreclosure process, the title has been cleared, and now the lender owns the property. A short sale is where the owner has ceased making payments or is significantly in default (usually), owes more than the property is worth and is cooperating with the lender to get the home sold. There are major differences in how you deal with each of these as an investor. I’m not going to talk so much about strategy here as I will mechanics.

The vast majority of individual bank owned properties is owned by large, national banks. The banks I’m seeing with property most frequently are big national lenders. Bank owned property has been through the foreclosure process, is probably with a “special servicer” or else with an internal group charged with disposition. Some groups are better and more efficient in dealing with their properties than others.

Negotiating with a bank can be a bit longer than negotiating with a private seller, but the savings can be huge. Bank owned property has clear title generally but getting there often takes some time. What happens to the property during the foreclosure process usually ranges somewhere between neglect and abuse. The fact is though that required repairs can present an opportunity for you. If you’re not opposed to getting your hands dirty you will have a lot less competition than you will on a property that’s ‘mint’. If you’re starting out there are rehabilitation loans out there that are available like the FHA 203(b) that are very affordable and very flexible.

The main thing to keep in mind when making an offer and negotiating on a bank owned property is that the people you are dealing with have a process. If they are listed at $400,000 and you offer $300,000 don’t expect to get that kind of discount on your first round. Their process probably involves countering you at $395,000 or something similar. Don’t read into this like you would with a private seller, it’s definitely not personal. We had one bank owned sale that took 6 months to put together offering progressively lower offers. The buyer ended up paying 23% off the reduced ask price and almost 50% of the last sales price. It took some time, but it was worth it.

Short sales are a whole other ball of wax. I’m not going to offer you pre-foreclosure infomercial strategies, I’m talking about finding something on market, as most of them are, and how the process works. Short sales involve two parties at a minimum, namely the owner, and the lender(s). Short sales can be very complicated due in large part to the fact that so many Americans have second mortgages, HELOCs and the like, and so many of these are with different lenders. If the property is listed with a broker, hopefully they have a clue.

Short sales don’t have the benefit of the squeaky clean title that a bank owned property has. The title hasn’t yet had the benefit of the foreclosure auction. Depending on how short the borrower is you may be dealing with more than one bank. If the value of the property is less than the second mortgage and into the first you’re asking the second lender to essentially just walk away from their investment completely. Short sales are usually in better condition than bank owned property because most of the time the owner is still taking care of the property and is hoping to get as much as possible, possibly out of pride, possibly because they may be on the hook for some deficiency depending on the nature of the debt.

Short sales in my experience are enormously frustrating. It is not uncommon to have the seller accept your offer and then wait without word from the bank for months, and its not uncommon after waiting to simply see the property head into a foreclosure sale. Short sales still involve the personal connection that an owner has with his property to some degree. Short sales are both more complicated and for the most part offer less of a discount from market value than bank owned properties.