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What is a Short Sale?
A short sale home refers to a property that is sold by the homeowner for a lower amount than the outstanding mortgage balance owed on the property. Before a home goes on the auction block, the owner may be able to negotiate with the lender to sell the house, and the lender will forgive any remaining debt. Short sales are facilitated with the mortgage lender’s approval and occur to prevent outright foreclosure of property.
Just as foreclosures offer rare buying opportunities, short sales can be a short path to a valuable property at a bargain basement price.
Pros and Cons of Buying a Short Sale
Buying a short sale can mean snagging a property below market value, but the process is also known to be a lengthy one. Let’s review some common pros and cons of buying short sales to see if it’s right for you.
|Short sale homes are often sold below market value (which allows an opportunity to build equity)
|Short sales are known for having a lengthy process due to the fact that the lender must approve the offer instead of just the seller
|The lengthy short sale process may deter buyers and reduce competition
|Short sale homes are sold as is so you cannot negotiate repairs
|A short sale purchase gives buyers an opportunity to flip a home and make a great profit
|Short sales can have limited inventory and difficult to find listings
|Standard inspections and title searches are allowed so that you can purchase with confidence
|It can be difficult to find a realtor with experience working with short sales
» MORE: See today’s refinance rates
How To Buy a Short Sale Home
Buying a short sale home involves a different process compared to a traditional real estate purchase. Here are the general steps:
1. Search for short sale homes
Work with a real estate agent who is experienced in short sales is highly recommended. They can guide you through the process, help find suitable properties, and negotiate on your behalf.
However, it is possible to look for short sale homes on your own using a Multiple Listing Service (MLS). Look for properties listed as “short sale” or those in pre-foreclosure. Pay attention to those that say “Lender Approval Required” because those are probably short sale properties as well.
2. Get pre-approved for financing
Before making an offer, get pre-approved for a mortgage. This shows the lender that you’re serious and financially capable. Loan approvals that are underwritten are best, and be prequalified through two different banks so you have a back-up lender if something goes wrong.
If you are planning on paying in cash, getting pre-approval is not as necessary.
3. Ensure the short sale is worth the value
Make sure you have a good idea of the actual value of the property – the bank holding the current mortgage will want to recover as much value as it can, so it’s up to you to determine whether you’re getting a good deal or not. A real estate agent can help you by looking at other homes that have recently sold in the area and look into how much the seller owes to the lender.
If you get a chance to tour the home, bring along an expert to help you gauge the value of the property and recognize hidden problems that could cost you buckets of money to remedy.
4. Conduct inspections
Perform thorough inspections to identify any issues with the property. Short sale homes are almost always sold “as is,” so you want to make sure you aren’t pouring your money into a home with a potential major defect.
Do a title search the make sure the property is free of liens or judgments, check with the homeowners’ or condo association to ensure property dues have been paid, and make sure property taxes are paid. If any of those fees aren’t paid on the short sale house, you’ll have to pay them as the new owner.
5. Make an offer
Submit an offer to the seller with terms and conditions. The offer includes the sale price, earnest money deposit, and contingencies (like inspection and financing).
6. Negotiate with the lender
The negotiation process can take time, as the lender assesses the property’s value and your offer. Remember that in a short sale, you’ll often have to pay for many of the closing costs the buyer normally assumes. It’s also unlikely that the seller will be willing to do repairs or improvements as part of the deal, as is common with standard real estate transactions.
The whole reason for a short sale is because the buyer can no longer afford their mortgage and the bank is taking a loss on the property, so it’s not likely that either will be willing to absorb any more expenses. Keep that in mind when negotiating the price.
7. Finalize the purchase
If the lender approves, finalize the purchase by completing paperwork and closing the deal.
Tips For Buying a Short Sale
Short sales offer opportunities for buyers to purchase homes at reduced prices, but they come with complexities. Being informed and patient throughout the process is crucial. Here are some top tips for navigating the short sale homebuying process:
Most likely, it will take time to get answers from sellers, since every decision requires lender approval, and questions must go through a hierarchy of various departments and supervisors. But patience may be rewarded in the end, so exercise it, and don’t try to put pressure on bureaucrats who have the power to shove your paperwork to the bottom of the pile.
Having all cash when buying a home is always preferred, especially when buying a short sale house. Cash will particularly help if the appraised value comes in lower than the price.
Buy title insurance
When you buy title insurance, the insurance company should do a comprehensive background check on the property. This will uncover any “clouds” on the title, such as liens, debts, or back taxes. Be sure that you have a clear title or you may wind up owning somebody else’s problems.
Not all short sales are bargains
A home is only a good deal if you get it for a price below current market value. In today’s real estate market, the previous owner may have paid way too much for the house. Even if you get it at a discount from the original price, it still may be inflated above current market values.
Short sales are sometimes hard to find. Whether you’re a novice investor or simply shopping for a home for yourself and your family, let your realtor know that you’re interested in short sales.