Taking out mortgage will allow you to write off the interest and save the cash for investment purposes. Depending on your tax bracket and investment vehicle, one might be more beneficial for you than the other. That will entirely be up to your situation and goal.
I have sold both REO and preforeclosure homes. It is all depends on the properties. There is one REO bank owned home for sale in Santa Clara with 46 offers in 5 days. It was sold to an all cashed buyer.
If it is a very hot property...YES! You use all cash then you will have a better chance to get it. I do keep track of REO and bank own homes.
I sell a lot of bank owned and short sale homes.....banks want market value...or very close to it. An all cash transaction does not necessarily mean you'll get a huge discount. It comes down to the bottom line.
If the home has already reached the point of foreclosure (complete) and the bank still has the for sale sign out, CASH might be perceived as the better deal for the bank and thus might consider a deeper discount. No guarantees. Seems reasonable. But, the same argument could be made with a short sale. The bank wants two things: (1) Their remaining investment and (2) OUT from under the house. The faster the better. They would probably be out much more if the home went into foreclosure. But, you also then have the seller involved to add a little anxiety and another negotiation dimension. And if the bank thought they could do better financing than accepting a full cash offer (interesting), the same might hold true.
Now having said the above, buying foreclosed homes or pursuing short sales can prove to be time consuming, frustrating with less than a warm and fuzzy feeling when it is all over. There are some liability issues here because of new laws designed to protect the public facing either of these issues. Personally, I have chosen NOT to work clients who are involved in such issues. At my stage of life, this arduous process is not worth the pain and suffering, time commitment and the potential liability that one could assume under Distressed Property Laws (currently the case in the state of Washington). There always seems to be unexpected baggage that accompanies efforts with rewards that seem â€œto be to good to be trueâ€. Look at the mess we are currently in.