The process of foreclosure has different stages. The buyer’s experience will differ slightly depending on the stage.
Pre-foreclosure. When keeping up with mortgage payments is becoming difficult, a homeowner may fear that foreclosure is in their future. In order to avoid the bank from taking the house, the owner may rush to sell it. They are motivated to take a low offer, provided it will get them out from under their mortgage. Because the homeowner, and not the bank, is still calling the shots, the buyer can negotiate things like repairs prior to making an offer.
Short Sale. Like a pre-foreclosure, the bank has not yet seized the home. In a short sale, the homeowner gets permission from their bank to accept less for the home than the amount they still owe on the mortgage. The reasoning is that a lender will prefer a reasonable offer, even if it comes up short, rather than dealing with a foreclosure. Short sales require a great deal of flexibility and patience in a buyer. There is no guarantee the bank will agree to the offer, and even if they do, it can take a considerable amount of time.
Auction. The most common way for a bank to sell a home they’re in possession of due to foreclosure is with an auction. This can be a very fast way to buy a home, but there are some obstacles. First, buyers usually need to be able to pay cash. This alone will usually rule out a lot of potential buyers. Second, there could be stiff competition from other shoppers. It is probably best left for properties meant to be investments, rather than for a home you hope to move into.
REO. REO, or “real estate owned” homes are actually owned by the bank. In some cases, they are still unsold after an auction. They are houses that the lending bank is selling on the open market through a real estate agent to recoup their losses.