All About Short Sales

 

What is a short sale?

A short sale is when the seller of a home is “upside down” in their mortgage and is trying avoid going into foreclosure by selling the home before the bank takes possession of it.  The seller will need to get the bank to agree to accept less money for the home than what they owe on the mortgage.  

Who benefits from a short sale?

Different parties benefit in different ways.  The lender avoids the expensive repossession process that they would have to undergo with foreclosure.  The seller avoids the negative ramifications to their credit score and the possibility of having to file for bankruptcy.  Buyers can potentially benefit from a short sale by getting a home they couldn’t otherwise afford, or entering into a market they couldn’t otherwise afford.  But buyers should be cautious of the potential pitfalls of a short sale, and should always have the help of an experienced real estate agent when attempting a short sale purchase.

What are the pitfalls of short sale transactions?

There are several things to be aware of when considering a short sale—things that make the process very different from a typical home purchase.  Remember that you are dealing with a seller and a lender, both of whom have money at stake and stand to gain from selling at the highest price possible.  Also, there could potentially be additional lenders involved.  Since all of the lenders have to approve the short sale, getting a response from an offer can take months.  A lender might never respond at all to your offer if they deem it too low, or they could respond and you could get all the way to escrow only to find out that the bank has been entertaining other offers and you’ve been beat out after spending money on an inspection and title report (this would normally be considered unethical in a real estate transaction).  

Short sale homes can also have expensive problems that arise from the seller’s lack of funds to maintain the home.  Typically, the seller has been living in the home (as opposed to foreclosures) and so it will be inhabitable.  But problems related to neglect can become costly.  This is why it is important to get a home inspection.

Keep in mind that the home is likely sold “as is,” meaning that the lender is not looking to give the buyer credits for home repairs or do any home repairs prior to selling the home.  They are unlikely to lower the price based on the inspection report nor will they be paying a buyer’s closing costs.  However, it is still appropriate for the contract to have an inspection contingency and for the potential buyer to be able to back out of the deal based on the inspection report.  The details of this part of the contract will be something that an experienced realtor can help you with.   

What if I still really want to buy a short sale home?   

Perhaps you’re thinking, “The home I love just happens to be a short sale.  I still want to go for it!”  You’ve already taken an important step by researching the details of a short sale and understanding what you might have to look forward to.  You’ll want to take some additional steps to protect yourself and have the transaction go as smoothly as possible:

  • Find out if the short sale has already been approved by the lender.  Even if it is listed as a “short sale,” the bank might not have approved it as such.  If the sale has not been approved yet, this can add approximately two months per lender involved to the process.
  • Make sure you have your financing in order.  Cash offers are best, but preapproval with a large down payment and flexible timeline will make your offer more attractive.
  • Get an inspection.  Be prepared to take on additional costs for problems and maintenance that arise from the home having been neglected.
  • Keep looking for other properties—the bank might be keeping their options open as well.  Ultimately, if you find a home that you can buy directly from a seller, that process will probably be much easier.
  • Do your own market research.  Just because a home is a short sale does not mean that it is priced cheaply.  Understand the market in the listed home’s area.
  • Most importantly, hire a real estate agent who has experience in short sales.  Having the help of an experienced professional like me will be crucial in navigating this complex process and will ensure that all of the above items are addressed.