For years, many buyers routinely steered clear of foreclosures and short sales. In their minds, such properties were “damaged goods” — real estate remainders that were likely to be dumps and money pits. Why risk such a big investment on a property sold in distress?

We’re now in a housing market unlike any we’ve seen in years. Inventory is tight in many areas. Meanwhile, the poor economy of the past few years has produced more properties in foreclosure or offered as short sales.

And so, as you enter the market either for the first time or as a seasoned buyer, you should be on the lookout for “distressed” sales. You might find a great property you’d otherwise have overlooked if you categorically disqualified foreclosures and short sales. And when the market is tight, looking at distressed properties makes even more sense.

The risks to buyers of foreclosures & short sales

Foreclosures and short sales aren’t just your typical buyer/seller situation. They involve more layers. In a bank foreclosure sale, also called real estate owned (REO), the bank is the seller. Because the bank employees have never lived at the home, they know nothing about the property. To them, the home you’re considering buying is simply a statistic — a cell within a large spreadsheet viewed by a worker behind a desk halfway around the country.

In the case of a foreclosure, the bank sells the home “as-is” and requires the buyer to sign dozens of documents releasing the bank of any liability. The worst-case scenario: You buy a foreclosure only to discover a major problem, such as a property line dispute or previous leaks that caused mold or dry rot.

When purchasing a short sale, the seller needs to go to their lender to “approve” the sale. In essence, the owner is trying to sell for less than the loan amount, so they need the bank to approve the sale. Historically, banks are slow to give the thumps-up. This can lead to a situation in which a buyer waits for months for the bank to approve the short sale, only to have the bank reject it. Meanwhile, the buyer has missed out on countless other properties.

Reasons to consider a foreclosure or short sale home

While there are clearly risks in buying a distressed property, we have so much more information now on homes than previous generations. Today’s Internet-connected, savvy buyer can learn a great deal about foreclosed and short sale properties before signing on the dotted line.

The old saying “no risk, no reward” certainly applies to foreclosures and short sale properties. Distressed sales tend to be priced from 5 percent to as much as 15 percent below the current market value.

Also, keep in mind that foreclosures aren’t necessarily dumps. The recession impacted people in all income brackets. It’s not unusual to find multi-million dollar homes in excellent condition and in good locations in foreclosure or offered in a short sale.

How to minimize the risks

If you’re looking for a home in a market where inventory is tight, buying a home in foreclosure or short sale can be a great option. There are many ways to mitigate the potential risks:

• Search town records for past building permits to see if anything out of the ordinary was completed or planned for the property.
• Have the home inspected top to bottom before getting too far along in the process.
• Knock on neighbors’ doors to see what information they have about the home, the neighborhood or the previous owners.
• Look at the home’s previous sales records. Many times the homeowner tried to sell once or twice before becoming distressed. If that’s the case, review the home’s sales history. If there was ever a contract on it, chances are there might be an inspection report somewhere. Have your agent call the previous listing agent to find out more about the former owners or the property.

Look for hidden values

There may be absolutely nothing wrong with the property in foreclosure or sold in a short sale. The bank has discounted the home because it sells such properties as-is, without disclosures. If you do your homework, you can use this situation to your advantage. And should you learn of a major problem with the house, negotiate with the bank for a lower price.

Don’t forget: Banks aren’t in the business of owning homes. They want these properties off their hands as soon as possible. Banks will take seriously any buyer who’s well-qualified and ready to close a deal.

Related:

• Why Do Short Sales Take So Long?
• How to Spot a Home That Might Sell Below Asking Price
• Buying a Foreclosure? Watch Out for These 5 Landmines

Brendon DeSimone is a Realtor & HGTV real estate expert. He has collaborated on multiple real estate books and his expert advice is regularly sought out by print, online and television media outlets like FOX News, CNBC and Forbes. An avid investor, Brendon owns real estate around the US and abroad and is licensed to sell in two states. You can find Brendon online or follow him on Facebook or Twitter.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.