How to Buy a Short Sale

What is a Short Sale?

A short sale occurs when the homeowner sells the property at a price that won’t cover the remaining amount to be paid on the mortgage and associated selling expenses. The homeowner thus avoids foreclosure by providing the bank with someone else who’s willing and able to purchase the home.

Lenders are apt to agree to a short sale if they know the homeowner can no longer make his or her mortgage payments. The sale can be better for the bottom line that expensive foreclosure proceedings (often costing as much as $40000 to $50000) and can save them time as well.

Sellers opt for a short sale to keep foreclosure from devastating their credit. (The short sale has a detrimental effect on credit, too, but it’s not as severe and doesn’t last as long.) Short sales are often forgiven, in which case there’s no need to repay the deficiency.

Moreover, the seller doesn’t pay tax on the perceived “profit” from a short sale, nor does he or she pay fees to the realtor, who does most of the work. Thus a homeowner who’s unable to make mortgage payments derives several benefits from a short sale.

For buyers, a short sale offers the chance to secure a suitable home at a bargain price. But when considering pursuing a short sale, you should be aware that there are potential problems to offset this advantage.

Should You Look for a Short Sale Home?

Short sale buying opportunities are most plentiful in a weak housing market. In a strong housing market, you might look for a long time and never find a short sale house that fits your needs.

Even with the help of an experienced agent, short sales transactions are complicated and can take a long time, often as long as several months. It’s entirely possible (and legal) for the lender to end up rejecting an offer after the seller has accepted it, and sometimes what was originally a short sale house winds up going into foreclosure. Homeowners sometimes list properties at a low price without the bank’s approval or even knowledge, a potential buyer then offers based on that price, and then the bank rejects the offer.

If these potential problems don’t deter you, then you may indeed possess the patience and determination to search for a short sale house. Here are some things to watch out for and advice to help you negotiate the process successfully.

Pointers for Buying a Short Sale House

Make sure the homeowner and property qualify for a short sale. Remember there can only be a short sale if the owner is experiencing financial hardship, perhaps as a result of illness or losing a job.

Similarly, make sure the listing agent has obtained a short sale package from the lender. As noted above, at this early stage, you’re a long way from actual short sale approval, but the package demonstrates the bank is at least willing to consider a short sale.

Find out how much money is owed on the mortgage. If there’s a serious delinquency between the selling price and the amount still owed, the lender is apt to decide foreclosure is a better option than the short sale.

You should also determine if there’s only one mortgage or more than one. If there’s only one, the odds of reaching short sale approval and closing are significantly higher. (Second mortgages generally take the form of home equity lines of credit.)

If there are multiple mortgages and you’re still game, find out if they’re from the same bank. If they are, the chances of short sale approval are better because only one lender needs to be convinced that the short sale will benefit them. Since second mortgages get paid off first, the lender who provided the first mortgage has to evaluate the possibility of not receiving any money. Sometimes, though, the lender on the second mortgage will release a lien on the property in exchange for a relatively small payment.

Finally, determine how good the real estate agent is at closing a short sale. If the realtor has experience and expertise, those qualities can be brought to bear to achieve a successful negotiation with the lender. Whereas if the negotiation fails, there will be no short sale and the house may well go into foreclosure.