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If a lender is willing to accept a discount on a mortgage to avert a possible foreclosure auction or bankruptcy, then it is known as a short sale. In other words, you are buying the property directly from the lender for a discount instead of from the seller. To clarify further, imagine a homeowner is facing foreclosure and has an existing first mortgage of $400,000, you directly make an offer to the lender for $320,000, which is to be treated as full settlement of the loan. This, in a nutshell, is called a short sale.

The question that obviously arises is why the lender should be willing to accept such a discount. One reason is banks or lending agencies do not like excess inventory and bad loans on their books. Thus, when they get a chance to sell the property without a huge loss, they may as well do it. Secondly, lenders are fully aware they could be bigger losers if the property goes to auction. They feel would be better off accepting the discount rather than the cumbersome route of auction.

Foreclosures are steadily on the increase, which means more and more opportunities for the real estate investor. It is advisable to accomplish a short sale when the property is in the pre-foreclosure stage.

One can visualize two different stages within pre-foreclosure. The first stage is when borrowers are behind on payments and the second stage is when those behind on payments are facing a notice of default. In order for you to successfully get a short sale, you must seek the homeowners who are in the second stage of pre-foreclosure. Once the notice of default has been recorded, banks also become agitated and so you are more likely to get a discount. All mortgages can be discounted immaterial what type of condition the property is in. You should more appropriately perform a short sale on the houses that need renovation and repairs because lenders will be more forthcoming in offering bigger discount.

However, foreclosure investment in real estate is not without its pitfalls. Foreclosure investing is certainly not a good approach for beginners. It is more for investors who have at least a couple of years' experience in real estate market. The profits from foreclosure investing are bound to be huge and that makes foreclosures attractive. But one disastrous foreclosure investment can wipe out your capital and your enthusiasm for all future investments.

There are three stages to buying properties in foreclosure process - buying at the pre-foreclosures, buying at the foreclosure auction, and buying from lender post the foreclosure sale. If you buy from the property owner before it goes to auction, you will be a beneficiary. Buying at the auction means if nobody bids, the lender gets the property. Buying from the lender after the auction is called buying REO (real estate owned) or Repossession. REO is less risky than in buying at the auction as REO is somewhat similar to a regular sale. The foreclosure purchase can also be risky. A pre-foreclosure seller might be desperate and mislead you about the condition of the property and the neighborhood. There might also be liens on the property that the seller may claim he forgot to mention. The big utility bills become the buyer's responsibility if the pre-foreclosure investor failed to check them out.