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Related topics: homes, home buying, foreclosure, home prices, mortgage

Last August, Kerry Deland, of St. Cloud, Fla., finally nabbed her dream home -- a bank-owned foreclosure with three bedrooms, two baths and five acres of land for her horse -- for an easy-to-take $111,900. But her closing was delayed in October after the seller, Fannie Mae, temporarily put all of its foreclosure properties on hold.

Deland patiently waited out the scare. By late November, as all 50 state attorneys general continued their investigation of so-called "robo-signers" and the process used to repossess many homes, Fannie Mae -- as well as Freddie Mac, Ally Financial, Bank of America and JPMorgan Chase -- lifted the freeze. Fannie Mae then extended Deland's contract, and she closed on her new home, moving in Jan. 20. "To me, it's been worth it," she says. "This is what I've been wanting for over a year."

Before the robo-signers and the documentation problems came to light last fall, bank-owned properties sold for an average discount of nearly 41% off the price of "normal" homes for sale. The discount could become even more attractive if spooked buyers stay out of the market. That spells opportunity for buyers prepared to do their homework and abide by the sellers' rules -- yet act quickly when they spot a good deal.

Bona fide bargains

How do you avoid getting caught in the red tape of a foreclosure dispute? Lenders imposed the foreclosure freeze for two reasons: to determine whether completed foreclosures were handled properly -- and, if not, to fix them -- and to correct the process for future foreclosures. So the more recently a foreclosed home was listed for sale or relisted following a review, the more confident you can be that the bank or institutional seller holds "good title" to the property and has the right to sell it.

Another clue: A title insurer will commit to providing you with an owner's policy. That means the odds of a challenge to your ownership are slim enough that the title insurer is willing to agree to defend you. And all the legal squabbling won't change the fact that the vast majority of homeowners in foreclosure belong there.

You can bid on a foreclosure at auction. But for most homebuyers, real estate-owned properties, or REOs, are a far less risky route to a bargain. If bidders at foreclosure auctions fail to meet the bank's minimum (usually the balance of the mortgage), the bank will buy back the home and sell it as an REO. With an REO you don't have to deal with a harried homeowner, a difficult-to-evict tenant or, in some states, a mandatory redemption period during which the previous owner can try to get the home back.

For banks and other institutional sellers, REOs are financial baggage. They aim to sell them quickly and efficiently and to recoup as much of their money as they can. They typically respond to purchase offers within days and will close as quickly as possible.

Contrast that with short sales, in which distressed homeowners hope to sell for less money than they owe, subject to their lender's approval. In Las Vegas, almost half of the available listings are short sales, but exclusive buyer's agent Adele Hrovat says that it can take six months or longer for a bank just to say it will consider the offer. It can take a year or more to actually decide (and the answer is usually no).