What short sale means for buyers

House with a short sale signYou may have heard the term “short sale”, but what is it? The term short sale is real estate language for a home that is offered for sale at a discounted price below the mortgage balance. In most situations, the homeowner is facing foreclosure and the lender agrees to allow the seller to fall "short" of the mortgage balance.

In many short sales, the seller has either defaulted on the loan or is close to foreclosure. Short sale contracts may not completely discharge the seller from their mortgage obligation, unless specifically agreed to by the seller.

After finding a prospective home buyer, the homeowner or real estate agent will present the lender with the buyer's offer. In some cases, an appraisal or market analysis accompanies the buyer's offer to the lender. The lender will ask for a pre-approval letter from the buyer (see below). The approval of the contract is up to the lender, not the homeowner. Most real estate agents who have experience with short sales will tell you that lenders do not move fast after they receive a short sale offer, so be prepared to wait until someone at the bank or mortgage company responds to your offer. In fact, you may wait months for your offer to be approved or rejected by the bank. Short sales are best for buyers who can wait.

The downside of buying a short sale home

The home will be sold "as is." The home buyer will be responsible for any repairs that may be required by their lender (i.e. roof, foundation, retaining wall, etc.); and it is possible to make the repairs for your mortgage company, only to have the sale fall apart at the last minute for one reason or another.

You will pay all closing costs when you buy a short sale. Banks are likely to refuse to pay fees that are customarily split with the seller, such as deed transfer, mortgage or excise stamps

If the home is vacant and the utilities have been disconnected, the lender is unlikely to have the utilities turned on for a home inspection.

An earnest money deposit will accompany the offer, and if the sale drags on and you want to purchase another house, the release of your deposit may take sometime.

Sellers can be uncooperative and slow to submit paperwork required by their lender, this may stall the review process.

Some banks/mortgage companies require home sellers to make a payment at settlement, called a “contribution”, to help reduce the lenders losses. Some sellers wait until the last minute and then refuse to pay the contribution fee or think that the buyer will pay it for them. When this happens, the short sale is not approved and will not close.

Other drawbacks to a short sale include:

  • the seller canceling the short sale contract
  • a foreclosure action which prevents the short sale.
  • the seller files for bankruptcy.

Making an Offer on a Short Sale

If you are interested in a short sale property, choose a real estate agent who has dealt with short sales. Your real agent should do some research before you make an offer. You need to know how much the homeowner owes on the property and whether the homeowner has more than one loan. If there are multiple liens on the home, the approval of all lenders are required to make the sale, and the more lenders there are, the harder that will be to get approval of the short sale, because each lender must accept a smaller piece of the pie. Lenders reportedly favor offers of at least 85% of the property's appraised value, however in severely distressed real estate markets, lenders have been known to accept as little as 50% of the appraised value.