In today’s real estate market, it’s tough to even browse as a buyer without running into at least one short sale home. How does a short sale vary from, well, a regular sale? What does this kind of purchase actually mean for buyers, in practical terms? What potential pitfalls exist, and how can one minimize their risks?
A short sale occurs when a lender agrees to allow a home to sell for less than the remaining outstanding mortgage balance. This traditionally occurs when homeowners are in default of their mortgage (or, at least, behind on the payments) and are trying to stave off foreclosure. This need not be the case, however. If a homeowner is “upside down” on their home value and knows that there is no way to sell the house for a high enough price to cover the mortgage, they may approach the bank about a short sale as well.
First lesson - and it’s a biggie - the “sale” price on a short sale is a bit of a tricky concept. A traditional home sale involves a deal between the homeowner and the buyer. With short sales, the contract is actually between the would-be buyer and the current lender(s), with the listing agent as a go-between. The homeowner actually has no say in the selling price.Things get even more complicated if there are second (or even third!) mortgages or liens against the property, because all the lenders have to get something out of the deal. Despite what you may have heard, the odds of getting a fire-sale price on a gorgeous home via short sale are slim to none. More than ever, banks are invested in recouping as much of their initial investment as possible, and that means reclaiming the maximum amount of the mortgage. Plan on paying close to market value on a desirable property… if not higher!
Secondly, know that buying a short sale is a long and all-too-frequently frustrating purchase. The first figure of the dance involves getting a selling price approved. This can take weeks, if not months. Low-ball offers are usually discarded before they even hit a loan officer’s desk. There could be competing offers submitted, so it’s important to make your offer count. Sometimes buyers will have to resubmit their offer multiple times, going up each time, to get an approval - if at all. Putting together an attractive offer package with loan pre-approval and proof of earnest money is critical to being taken seriously. Even then, be ready to “hurry up and wait,” as the saying goes. If you need a place to live right now, a short sale might not be for you. (If you lack the patience of a saint, it may also not be for you!)
As a buyer, the best thing you can do is ensure that you work with an agent who understands the short sale process. Navigating the ins and outs of specialized contracts and communicating effectively with lenders are not skills that all real estate professionals have. Getting a feel for your agent’s experience is necessary - it will make a large difference in your expectations, frustration level, and, ultimately, whether or not you have a real shot at the home of your dreams! No, buying a short sale home isn’t for everyone. When they work out, however, these deals can work out serendipitously for everyone involved.
