Are Distressed Homes Worth the Hassle?

Lured by the prospect of a spectacular deal, many buyers start their search with short sales and foreclosures, only to discover that those properties come with more baggage than they bargained for.

Distressed properties may be concentrated in undesirable areas. They are often in poor condition because strapped owners either couldn't afford to maintain them or stripped them before moving out. Lenders have learned to low-ball prices on short sales and nicer bank-owned foreclosures, known as REOs, in order to attract a frenzy of bids that ultimately jack up the price. Investors nabbing deals with cash often beat out buyers who require financing and protective contingencies in their contracts.

Short sales can take months to gain lender approval and close, and banks often won't start the process until they have an offer. Some multiple-listing services now require sellers to indicate whether the lender has yet to approve the short sale ("pending approval") or has approved the short sale and price, which spells a much quicker closing. Beginning in April, lenders participating in the federal Home Affordable Foreclosure Alternatives program must respond to offers on "price approved" homes within ten days of receiving an offer.

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Looking for a deal on a condo? Be careful. For example, in Miami, so few owners are paying up that association fees are skyrocketing and condo associations are going bankrupt. Buyers who need financing are all but locked out because Fannie Mae, Freddie Mac and the FHA won't back loans in buildings dominated by investors and delinquent owners. You'll have lots of competition to buy in buildings that do qualify. If you decide to shop for a condo anyway, look for buildings with high occupancy (how many lights are on at night?), and talk to current residents.