You'll continue to hear and see a lot more properties in the "short sale" and foreclosure ranks as we move through the correction phase of our market. Nevertheless, low prices are not the only thing you should look for when bidding on these diamonds in the rough.

The challenge you're going to face with these valuable jewels is how to dig them out of the ground without cracking them into little pieces and without bursting your budget.

So you have a condo for $214,000 on a short sale list, and you know that the owner paid $249,000 two years ago for that bugger. Now, you feel like is that time to purchase because earlier this year, they were selling for $209,000 and the last few settlements were creeping up oh so slowly -- $209,999; $210,500; $212,000. Meanwhile, one unit down the hall in model condition is fetching $224,000. So with some sweat equity, you believe you could buy lower than low and walk in with some equity built-in.

Maybe. I recently attended a seminar on Foreclosures and Short Sales by MBH Settlement Group, L.C., a title and settlement firm in the Washington, D.C. suburbs where the short-sale and foreclosure market is in full throttle.

Now, does the increase in short sales/foreclosures mean that all the houses on the market are at risk? Of course not. The fact that there are more homes now on the market in short sale/foreclosure situations than in the past only means there are more on the market than in the past.

Most houses -- the overwhelming majority -- are selling at market rate, the sellers are walking away with plenty of cash so they can get a great deal on a house that is poised to appreciate with the coming sellers market. However, there are a percentage of homes on the market where you can get a good deal. But when you come across these, be aware of what may be attached -- liens.

Seminar leader and branch manager Todd Fisher explained one of the hidden dangers prevalent in these sales is the possibility of liens from various directions. Mr. Fisher has spent 20 years helping buyers and sellers of distressed properties navigate the short sale and foreclosure terrain.

Understand that liens are sold with the house -- much like the old rotted fence in the back. The seller doesn't take it with him. You, as the new owner, must take care of it -- fix it up, replace it or knock it down.

Liens must be dealt with in the same way -- you must either, work out a payment agreement with the lien holder, see that it is paid off at settlement or get them canceled altogether. It is the buyer's responsibility to find out if these exist and what to do to deal with them. (If you have an agent experienced in these transactions, s/he will know what to do.)

"A proper foreclosure cancels any junior/subordinate liens (liens filed after the mortgage being foreclosed) but leaves in place any senior/superior liens (those liens filed before the mortgage being foreclosed)," Mr. Fisher said.

Liens that survive foreclosure include, but are not limited to, municipal and mechanics liens (your state may allow others). Keep in mind, that the IRS has 120 days to redeem its tax bill from the sale of the house. In other words if you get a good foreclosure deal and settle July 30, the IRS has until November 30 to set aside (void) the sale and redeem the property so they can auction the house to get its money.

Better to contact the IRS and deal with the lien before settlement than to settle, count on dumb luck and cross your fingers that the IRS won't go after the property to settle a tax debt from the former homeowner.

When it comes to the short sale be sure to do your homework and don't ignore the facts because you're blinded by dollar signs.

Published: July 20, 2007

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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.