A short sale is a real estate transaction in which the sales price is insufficient to pay the loan(s) encumbering the property in addition to the costs of sale and the seller is unable to pay the difference. Said simply, it occurs when the selling price of a home is less than the balance owed on the property’s mortgage but the lender agrees that agreeing to sell the property at a loss is better than trying to get additional funds from the borrower.
In a short sale, both the bank and the seller consent to the short sale process because it allows them to avoid foreclosure, and in most cases it releases the borrower from the obligation to pay the remaining balance of the mortgage (the loan deficiency).
Short sales are not foreclosures! A foreclosure is process of repossession by a lender, whereas the lender and the borrower agree to a short sale. The bank may at any time cancel the short sale if they disapprove of the sale price and any short sale offer contract includes a contingency where the bank must approve the sale.
After the real estate collapse in many parts of the US, short sales have become more common than ever. Homeowners are discovering the houses they paid top dollar for a few years ago are often only worth little more than half the price today and there is little to no room to refinance in the event of a financial emergency.
Buying a short sale house can often be a painstaking process. Banks take months to make decisions and it can get quite complicated. However, if you have patience and a little flexibility for a closing date, a short sale house can be obtained at a great price.
If you are considering buying a short sale property, you should know:
- Many short sale deals can take 3 to 6 months to close.
- Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller does.
- Short sale listings typically have multiple purchase offers on them.
While buying a short sale usually means you will obtain a property well under current market value, there are also many cons to purchasing a short sale home. They include the following:
- Lenders use detailed comparative market analysis (CMA) reports and may not accept short sale pricing, holding out for a higher price.
- Homes sell “as-is” with no SPDS (Sellers Property Disclosure Report) or CLUE (Comprehensive Loss Underwriting Exchange) reports provided to potential buyers, which means the lenders will not pay for any repairs to the property.
- Lenders can change conditions by renegotiating terms at the last minute.
- The length of time to close is often undetermined and just to hear back about an initial purchase offer can take months.
- Higher buyer closing costs since lenders will not pay for any extras.
Don’t be fooled by short sales! Work with an experienced real estate agent who can handle every step of these deals.
