What are Short Sales?

Short sales occur when a seller owes more on his mortgage than the property is worth.

Let’s say Pam Seller purchased a home for $175,000 using 100% financing.  After paying on the loan for a year and half, she currently owes $171,304.  Now, she needs to sell.  Perhaps she has fallen ill and can’t keep up with the payments or her employment requires a move to another city.  When she talks to a listing agent, she learns houses like hers are selling for $165,000.  That’s $6,304 less than she owes.  Add a 6% commission (or $9,900) to the listing agent, and she will need to pay $16,204 out of her pocket to sell the house.

When this is the case and the buyer does not have the resources to pay the difference, some lenders will consider helping the seller by allowing them to pay over time the difference between what they owe on their mortgages and what the home will sell for.  In some cases, the lender may even forgive the difference.

If you are interested in purchasing a short sale property, here are some important things to keep in mind…

  1. When you buy a short sale property, you are likely to get it for a little less than market value.
  2. Just because the property is listed at a certain price, does not mean you will be able to purchase it for that price.  Keep in mind the price advertised is usually below the amount the seller owes to their lender.  Sometimes, an inexperienced listing agent will try to attract attention to the property by setting an asking price that’s not only below what is owed to the lender, but substantially below the current market value.  The lender wants to keep their losses to a minimum, so they are not likely to approve a sale that will generate a lot less revenue than if they simply foreclosed on the property and sold it themselves.
  3. The process is lengthy and uncertain.  Most lenders take nearly four months to approve or deny a short sale.  If they approve it, the approval may be conditioned on the buyer raising their purchase price to be more in line with the going rate for similar houses.  As you can imagine, it is very frustrating for a buyer to wait four months for an answer only to learn the answer is “no” or “OK, but only if you are willing to pay more.”
  4. The person selling the house is having financial difficulties.  It’s unlikely they were investing much, if any, money in maintaining the property.  So, it’s more likely problems will show up during the home inspection.
  5. You’re less likely to negotiate any repairs on the home.  It’s common for buyers to request that sellers do some repairs on the house before closing.  With short sales, the seller often doesn’t have the money to do repairs.
  6. The lender will not do any repairs.  Remember the house is still owned by the seller.  The bank has neither the authority nor the interest in investing money to fix up someone else’s property.
  7. There is a reason you are getting a good price on a short sale.    You are dealing with lengthy, unpredictable time frames.  The house probably has not been well maintained and will often be in need of repairs that will be your responsibility after you close on the property.