Buying a Foreclosure, Short Sale or Bank-Owned Home in Massachusetts

Distressed property is the most misunderstood corner of this market, mostly because three quite different transactions get filed under one word. The risks, the timelines and the skills required are not the same in any of them.

Three transactions

1. The short sale. The owner still owns the house and is selling it for less than is owed on it. Every lienholder has to approve — first mortgage, second mortgage or HELOC, tax liens, condominium liens — and each of them holds a veto. The listed price is what the seller hopes a lender will accept, not what a lender has accepted. Nothing binds until the written approval letter arrives, and that letter comes with its own terms and its own deadlines. Expect months, expect to be one of several buyers who came and went, and do not sell your own house against a short sale closing date.

2. The foreclosure auction. Massachusetts is a non-judicial foreclosure state: lenders foreclose under the statutory power of sale in M.G.L. c. 244 rather than through a court judgment, after a borrower's right-to-cure period under c. 244, § 35A. What that means for a bidder on the day:

A deposit in certified funds on the spot, in an amount fixed by the published terms of sale.
No financing contingency. None.
No inspection, and usually no interior access at any point beforehand.
No inspection-waiver protection either — the 2025 regulation discussed in the inspection law post exempts foreclosure sales.
Occupants stay occupants. They become your problem.

The foreclosing lender bids too, usually up to the amount it is owed, and frequently takes the property back. Most auctions are not opportunities; they are a formality on the way to the third category.

3. The bank-owned property. The lender took it back and is now selling it as an owner. This is the version most buyers should actually be looking at: a normal purchase, with financing and an inspection, but on the lender's addendum, sold as-is, with limited disclosure — the seller never lived there and genuinely does not know — and a corporate signature process that is slower than a human one.

Why the discount exists: title

This is the part to understand before the part about paint colours. A foreclosure conducted defectively conveys defective title, and Massachusetts has case law on exactly that. *U.S. Bank v. Ibanez*, 458 Mass. 637 (2011), held that a foreclosing lender must have held the mortgage at the time it published the notice of sale; *Eaton v. Federal National Mortgage Association*, 462 Mass. 569 (2012), addressed the requirement relating to the note. Titles derived from foreclosures in that era have needed curing, sometimes years later.

The practical consequences:

An owner's title policy is not optional on a property whose chain includes a foreclosure. Some insurers will add exceptions, price differently, or decline; find out early, because a title insurer's refusal is itself the most useful piece of diligence you will get. Title in Massachusetts covers what the policy does.
Have your attorney examine the foreclosure documentation specifically, not just the chain generally.

Occupancy is the risk buyers most underestimate

A property with people still living in it — a former owner, or tenants who did nothing wrong — is your eviction to conduct, in the Housing Court, at your expense and on the court's timetable. Massachusetts tenant protections are substantial, and a former owner in occupation is not simply removable. Self-help is unlawful: changing the locks or cutting the utilities converts a delay into a liability. Never buy an occupied distressed property on the assumption that it will be empty by spring.

Condition, and what an empty house does over a winter

With the utilities off, nothing can be tested — not the heat, not the plumbing, not the appliances. Houses that sat unheated through a New England winter produce burst pipes and the water damage that follows. Add missing appliances, stripped copper, and every maintenance item deferred for the years the owner was in trouble. Budget as though nothing works, because that is the honest base case.

Obligations that travel with the property

Municipal liens — property tax, water, sewer, betterments. Get a municipal lien certificate.
Condominium common expenses. A condominium association's lien has a limited priority over the first mortgage under M.G.L. c. 183A, § 6, so ask the association what is owed and what it intends to collect. See condo fees, reserves and documents.

Financing a house in poor condition

Conventional and FHA lenders have property condition standards that a genuinely distressed house may fail — which is why some of them sit unsold. The renovation products exist for exactly this situation: FHA 203(k) and the conventional renovation equivalents let you finance the purchase and the work together. They take longer and require documented scopes and contractors, so start that conversation before you write. Auctions, by contrast, are cash.

Where the value actually is

Not usually in the headline discount, which is priced in by the people who do this professionally. It is in the property whose problems are cosmetic, visible and quotable, and whose seller is slow rather than difficult — the bank-owned house that has been on the market for ninety days because nobody wanted to deal with a corporate addendum. That is a solvable problem, and solvable problems are where discounts survive contact with reality.