You may have heard that buying a short sale is a great way for prospective homeowners to get a property at a bargain price. It’s true that you may be able to buy a short sale for a lower price than in a similar home would sell for in a traditional sale. At the same time, you should be aware of the potential pitfalls associated with the short sale process.
How is a short sale different from a foreclosure, and what are the advantages and disadvantages of purchasing a short sale? Let’s get started.
Short Sales vs. Foreclosures
Before we get into the purchase process, let’s briefly go over the difference between a short sale and a foreclosure.
What’s a Short Sale?
A short sale in the real estate industry is when the proceeds of a property sale fall short of the balance remaining on the property’s mortgage loan. In other words, the seller owes more on the property than what he or she is selling it for.
The mortgage lender (commonly referred to as “the bank”) also has to agree to discount a loan balance or to take less money than what’s owed. Typically, the owner needs to prove financial hardship before a lender accepts a real estate short sale deal.
What’s a Foreclosure?
In a foreclosure scenario, the owner stops making payments and eventually vacates the property. Typically, it can take several months of missed payments for a foreclosure to be initiated by the mortgage lender, but the lender eventually has to take the property over and try to sell it on their own.
Even though this isn’t the ideal situation for the owner either way, a short sale is a much better option than going into foreclosure because a short sale typically doesn’t hurt the owner’s credit score as much as a foreclosure would.
Why Would a Lender Agree to a Short Sale?
This is a very good question. Why would a lender agree to accept less money than what’s owed on the mortgage? This is exactly what happens with short sales.
In a foreclosure, after the lender takes control of the property, the lender still has to put the house on the market, and it could take months before a house gets sold. Foreclosure is a very expensive process, and it’s one of the reasons why lenders would rather approve a short sale than go through with a foreclosure.
The Short Sale Process
Purchasing a short sale property can get you a great deal because you can get it for a lower price than you typically would in a regular transaction. But that said, there are some things about the process that you should know before rushing out to find a property.
Because the lender is agreeing to sell the property for less money than it would take to pay off the loan, you essentially have to put an offer in and have it be accepted by the lender.
Because you have to get approval from the current homeowner’s lender and then take the final agreement back to your own lender to secure funding, it can also be a very lengthy process. There’s no real time frame that can accurately describe how long a short sale approval takes because it differs greatly from lender to lender and case to case.
It can be helpful to work with an experienced real estate agent because they’ll be able to help you navigate the process of putting an offer in and act as the go-between for you when communicating with your lender, the seller’s lender, the seller and any other relevant parties.
You’ll also want to get a preapproval for a mortgage of your own. This will give the seller’s lender confidence that your offer is serious and that you’ll have the funds available to back the offer up.
Advantage of Buying a Short Sale
There’s really one major benefit to buying a short sale property: You’re getting a deal because, in many cases, the home is being sold for less than the seller could get in a traditional transaction.
As with any purchase, you should research the market carefully so that you have an idea of what you might pay for a short sale home, but in the end, it very well might make a lot of sense to buy a short sale property if you’re looking for a good value.
Disadvantages of Buying a Short Sale
There are a few disadvantages to a short sale purchase. One of the biggest is that you not only have to get the seller to buy in to your offer, but the seller’s lender has to agree to take the offer as well. This not only lengthens your purchase process and overall timeline but also means there are more opportunities for your offer to be rejected.
Short sale homes are sold “as is.” If there are problems with the home, you can’t negotiate with the seller to fix them because the lender is ultimately in control. So if you’re looking at short sale properties, take careful note of the condition of each one.
If at some point the seller stops making mortgage payments, all that work you put into the offer and negotiation could go down the drain if the property goes into foreclosure.