Buying a Short Sale Home

If you are in the market to purchase a home; you have probably seen the terms short pay, short sale and pre-foreclosure.  The terms are all different ways of saying the seller is trying to negotiate with the bank to avoid a foreclosure.

This kind of transaction occurs when the lender and the seller make an agreement where the lender takes less money than the seller owes on the mortgage.  A short sale allows the lender to recoup some of its money without the added expense and time involved in processing a foreclosure.  The short sale is a benefit to the seller because it can limit the negative repercussions to their credit.  A foreclosure and possible bankruptcy creates much larger credit problems than a short sale does.  Publications that provide additional information regarding foreclosures are Foreclosure Investing Not A Get-Rich-Quick Venture and Foreclosure Opens Windows For Investors.

There are many things you will need to learn if you are considering buying a short sale home.

Although it seems as though you are buying a home from a bank, the lender does not actually own the home but they must approve the short sale before it can happen.  The reason the bank must give approval for a short sale is that they are losing money in the short sale transaction.  Short sale transactions are so named because of the loss the bank will be taking, however, they are usually not short in duration of time to completion.  The truth is short sales can take considerably more time and patience than any other type of sale or foreclosure.  More information regarding this can be found in Short Sell Your Home To Avoid Foreclosure.

A traditional real estate transaction and are short sale have some similarities and many differences.  While both use a purchase agreement; a short sale purchase agreement will specifically state the lender must approve the terms of the agreement and a traditional real estate transaction needs no approval beyond that of the seller.

A short sale contract will list state that you are buying a short sale home in “as-is” condition.  It is advisable to include a clause in the contract which will allow you to walk away from the purchase if the inspection detects serious problems.  The bank is unlikely to change the price to accommodate repairs to issues revealed during the inspection.  Banks also do not make repairs to the problems found during inspection.  The seller will probably not do anything about repairs either as they are already having financial difficulties.  Since sellers cannot provide any funds towards closing, you can request 3% from the lender to apply towards your closing costs.  There is additional information regarding this in Understanding the Escrow Process.

Buying a short sale home can be a very lengthy process.  If you are in a hurry to make a purchase the short sale may not be the way to go.  It could take several months for the bank to accept, reject or counteroffer on a short sale.  Including a deadline for bank response in your offer may lessen the amount of time you have to wait or it may have no effect at all.  It is also possible that the seller and the bank have not yet reached an agreement allowing the seller to proceed with a short sale.  If this is the case, your wait can be extended even longer.  There are no guarantees when you are buying a short sale home.

There are different views on the benefits to buying a short sale home.  Some believe that a short sale will be at below market value pricing and may allow a buyer to make an excellent deal; it can also create a situation allowing a first-time homebuyer the opportunity to purchase a home they could not afford in a traditional transaction.  Others feel that lenders will get the current market value of property through a Broker’s Price Opinion or appraisal before settling on how much of a loss they’re willing to accept.  Also the listing price may not even reflect anything the lender has agreed to; it may simply be a number the listing agent believes the bank may find acceptable.  The seller could even list the property to low to start a bidding war to drive the price up.  This is because some states allow the bank to collect the deficiency from the seller; the smaller the deficiency the less money the seller will owe.  The deficiency is the difference between what the property sells for and the amount the seller owes on their mortgage.  However, deficiencies can also be negotiated out of a short sale.

Properties that have been foreclosed on and are now owned by a bank are uninhabited.  This allows opportunities for squatter, vandals and other undesirable types to damage the property.  In a short sale the seller is probably still in the home; looking out for it and maintaining to the best of their financial ability.  This helps maintain the value of the property; a benefit to both the seller and the lender.

When you are thinking about buying a short sale home you should check into how much comparable properties are selling for in that area.  Plan to spend around fair market value – or a bit less – as banks will not be likely to accept a huge discount to market.  If you have the opportunity to make a traditional purchase for the same amount in the same area you might be better off to go that way; unless you are absolutely in love with the property you are already planning to make an offer on.  A traditional real estate transaction is almost always simpler than buying a short sale home.

A short sale is a very complex transaction; you will need to have an experienced agent on your side.  Choose an agent who has done many short sale transactions; they will know all of the rules and regulations related to short sales and may even be able to get you to closing faster than you would be able to do on your own.  These agents are also aware that they may not receive their normal commission.  Banks will frequently cut their expenses by lowering or refusing to pay commissions to listing agents.  Also the lower sale price will mean a lower commission for the buyer’s agent.  However, an agent experienced in short sales will already be aware of these possibilities.

It is a good idea to continue to search for another home to buy while you are waiting for the bank to respond to your offer.  Keep this option open by having your agent include it in the purchase agreement.

While you may have spent money on title searches and inspections and have even reached escrow, the bank may still be taking offers on the property.  It is probably unethical but not illegal for banks to do this so far as the purchase and sale contract allows for this.  Yet one more reason buying a short sale home can prove difficult.