Making Sense of Short Sales
The phrase “short sale” seems to be everywhere lately. You hear it on TV, see it in economic reports, notice it on real estate listing sites, and you may even have friends or relatives who have bought a home that was a short sale. But what does it mean to buy a short sale? Is a short sale always a good deal? What are the potential pitfalls?
Let’s take a look at potential homebuyers’ most common questions about the short sale process.
What exactly is a short sale?
A short sale occurs when a homeowner is underwater on his or her mortgage, may have missed payments, and is trying to make a deal with a bank in hopes of avoiding a foreclosure. The bank that services the mortgage agrees to let the owner sell the home for less than he or she owes on the mortgage. A short sale agreement allows the bank to avoid going through a lengthy foreclosure process, and it allows the homeowner to avoid the negative effects that a foreclosure has on his or her credit score.
How is a short sale different than a foreclosure?
In a short sale, the owner is likely still living in the home. The owner may have stopped making payments on the home, or may still be making payments. The owner is usually significantly underwater in the home (meaning they owe much more than the house is worth in the current real estate market). In a foreclosure situation, the bank has already evicted the homeowner and taken control of the house.
It’s important to note that when a potential buyer puts an offer in on a short sale property, the offer must be accepted by both the current homeowner and the bank. And, in some cases, multiple banks may have a stake in the home, because of prior refinancing or home equity lines of credits taken out against the home. In that situation, all banks must sign off on the offer. In a foreclosure, the homeowner is out of the picture, and the offer must only be accepted by the bank.
What do I need to keep in mind if I put an offer on a home that’s a short sale?
Patience is the name of the game when buying a short sale. Since there are multiple parties involved, the negotiation process can take months—much longer than in a traditional home transaction. Also, many banks only accept “as-is” offers on short sale properties. That means that they won’t do any repairs to the home as part of the negotiation process.
Since the number of short sale transactions has increased significantly over the last few years, your real estate agent should be well versed in the short sale process. Make sure to ask him or her any questions you may have.
Will I save money purchasing a short sale home?
Purchasing a short sale property can be a great way for first-time buyers to get into a home, or a smart strategy for buyers interested in “trading up” to a desirable neighborhood for a reasonable price. However, keep in mind that the asking price on a short sale home is usually set by the owner and his or her real estate agent, with the goal of generating a lot of interest in the property, and that the bank may not be willing to accept an offer that low. As in any real estate purchase, it’s important to find comps from the surrounding neighborhood and submit a competitive offer.
Is a short sale right for me?
A short sale is best suited for buyers willing to wait for the right deal. Short sale negotiations can span many months, and buyers can find themselves doing a lot of “hurry up and wait.” Additionally, short sales sometimes attract multiple offers, including all-cash offers from potential buyers looking for investment properties. It’s important to be comfortable with the negotiating process. But, if you have a flexible timeline for moving, are comfortable with possibly putting in multiple offers, and have found a property you love, completing a short sale transaction can land you the home of your dreams for less money than you might think!
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