What To Know About Buying A Short Sale

Buying a short sale can be a great opportunity to get a property at a reduced price, but it can also have its disadvantages. 

What Is A Short Sale? 

A “short sale” is a home that sells for less than the amount owed on the property. Lenders allow short sales to avoid foreclosure proceedings, which can be more expensive. 

Weigh the advantages with the drawbacks, and make sure your discount is steep enough to justify the extra work that comes with a short sale home purchase. 

Your Due Diligence Before Buying 

Base your offer on the property value, not the mortgage owed — that’s irrelevant to you. 

Short sale homes, however, are not necessarily priced below market value, and not all short sales are bargains. The short sale process is a risk that could cause you to miss out on other potential purchases. With all your time and resources tied up in short sale negotiations for months, you could miss out on an even better investment opportunity. 

Are Short Sales Difficult To Complete? 

Short sales are different from ordinary transactions. The existing loan holder — the current lender on the property — must approve the sale price and terms. Before they do, though, there needs to be a legitimate offer on the table. 

So the existing owner can list the house for sale, and get an offer, without having any idea what the bank will accept. Only after the owner receives the offer does it submit that offer to the lender. Even if a seller has already been approved by their lender for a short sale, there is no guarantee. They may believe your offer is too low. If this is the case, the lender may counter your offer, flat out reject your offer or they may not even respond to it. This is a significant and real risk considering you could have already been waiting months to even get to this point. 

Lenders Prefer All Cash or Large Down Payments 

Another risk of a short sale is losing out on the property to an all-cash buyer or a buyer who is able to put down a large down payment. When agreeing to a short sale, banks and other lenders prefer to deal with these types of buyers. They see them as less risky than a buyer who needs to get a large mortgage in order to purchase the property. 

Property ‘As Is’ 

Sellers attempting to negotiate a short sale are usually experiencing some sort of financial hardship. Therefore, they may not have the money to do upkeep on their property. This inability to keep up with maintenance may be obvious, or it may lie deeper in structural, electrical or plumbing issues. 

When you buy a short sale, you are usually buying the property ‘as is.’ The bank is already losing money on the property, so they will not usually make concessions for these maintenance issues. 

Beware of Unexpected Costs 

In the typical sale, sellers often contribute toward the buyer’s mortgage closing costs. But short sale buyers don’t often get the same seller concessions that traditional buyers do. Banks are not interested in helping the buyer, and may even add fees to recoup more of their losses. The “short sale administration fee” or “short sale processing fee” are common 

extra costs the existing lender likes to tack on. They typically equal one percent of the sale price. 

Ask for an estimated closing disclosure from escrow. This is the document that details all the fees associated with the transaction. Ensure the deal is still “good” after additional fees. 

How To Get Mortgage-Approved To Buy A Short Sale 

You don’t have to do anything special to finance a short sale property. As far as your lender is concerned, it’s no different than a regular home purchase. 

Make sure you are pre-approved for a home loan. The mortgage-holding bank will likely reject any offer not accompanied by a pre-approval letter. Also, ensure the property meets the lender’s requirements. The property must meet minimum standards for your chosen loan program. Ask the seller’s agent to disclose any property deficiencies, such as a leaky roof, peeling paint, or missing exterior stairs or handrails. 

Keep your pre-approval updated. Short sales take time, so you may have to renew your loan approval with new documentation every 30 to 60 days. Hold onto all pay stubs and bank statements during the process. Wait to order an appraisal until you receive final short sale approval. Appraisals expire after 90 to 120 days. At a price tag of $500 each, you don’t want to order more than one. 

Short sales, if you don’t mind the challenges and are ready for the extra time and costs, can be a good way to add instant equity to your home. It’s hard to make a bad investment when you do your due diligence and combine a lower home price with today’s bargain interest rates. 

* Realtor Since 2003 *

Phone/ Whatsapp: +1 973-946-2321