Homebuyer’s Guide to Buying a Short Sale

How to find and make an offer on a short sale

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A “short sale” is real estate lingo for a house that’s being put up for sale for less than the homeowner owes on the mortgage, Usually, the  homeowner is in financial distress and is trying to avoid foreclosure; sometimes, the seller has already defaulted on the loan.

How a Short Sale Works

The current trend with short sales is for lenders to reach out to sellers who get behind on their home payments, offering them relocation money and a path toward preapproval for a short sale. The lender will, as part of this process, order a BPO (best-price offer) analysis, showing what amount the house could sell for.

The seller’s lender will need to approve the short sale,  adding a potential hurdle—not to mention time delay—to the process. Unless you offer the preapproved BPO amount, the lender may still need to run some numbers, trying to balance the amount that would be lost on the loan against the probable loss (of time and money) if the property continued on into foreclosure.

A short sale may have an incredibly attractive low price, but that doesn’t necessarily make it a good deal. The seller may have overpaid to begin with, or the market may have fallen significantly. And as explained below, as the buyer you may be responsible for significant additional costs that aren’t accounted for in the selling price.

Making an Offer on a Short Sale

If you’re interested in a short sale property, choose a real estate agent who’s dealt with them before, and who is able to collect as much information as possible from the seller or the seller’s agent before you make an offer. Here’s what you want to find out.

How much the homeowner owes on the property. If it’s a lot more than you’re willing to pay, the lender is unlikely to approve the sale. Lenders reportedly favor offers of at least 85% of the property’s appraised market value, but in very badly distressed real estate markets, have been known to accept as little as 50% of this amount.

Whether the homeowner has more than one loan. If so, you’ll need the approval of all lenders to make the sale, and the more lenders there are, the harder that will be to get, because they must each agree to taking a smaller portion of the house sale proceeds.

What kind of legwork has already been done. Banks will approve a short sale only if the seller is in financial distress. Make sure the seller has at least contacted the bank and gotten confirmation that the bank will consider a short sale. Unless you’re not in any particularly hurry to buy a place, you don’t want to waste your time waiting for a bank to respond to an offer if you’re fairly certain it will just be rejected anyway.

What to Expect With a Short Sale

If you still want to buy a short sale after doing some basic homework, expect several differences from regular sales.

First Offers Are Often the Best

Short sale sellers will often approach the lender with the first offer received, even if it’s on the extremely low side. Why? Because once they’ve started the long process of gaining bank approval, they don’t want to derail it by bringing in an alternate offer.

You May Need to Pay Your Agent a Higher Commission

The lender, who is ultimately paying the real estate agent commissions, may negotiate them down with the seller’s agent, and your agent will get paid less as a result. If you have already agreed to pay your agent more in a buyer’s brokerage agreement, you’ll have to do so out of your own pocket.

The Property Will Be Sold “As Is”

Lenders offer the property in its present condition, with no reductions for repair needs. To make sure you know what state the property is in, you should be certain you have an inspection contingency in the contract, allowing you to have the property professionally inspected and to back out of the deal if you’re not satisfied with the results. See the Nolo articles Contingencies to Include in Your House Purchase Contract and Getting a Home Inspection for details.

You’ll Pay All Closing Costs

Closing costs are usually split with the seller, but the bank will likely refuse to pay any of them in a short sale.

Short Sale Transactions Take Longer

You may spend months waiting for your offer to be approved or rejected by the bank. Make sure your offer terminates at some realistic point in the future.

Expect the Unexpected

 When the lender finally approves your offer and sends the seller the paperwork to finalize the deal, it’s not uncommon for the seller to discover that the lender has inserted language saying that even after releasing the mortgage, the lender can come after the seller for the difference in what is owed—which, for the seller, defeats the purpose of the short sale, and may make the deal fall through.

Get Professional Advice on a Short Sale

In addition to working with a real estate agent with expertise in short sales, it’s a good idea to seek advice from a real estate attorney who’s experienced in handling legal issues involved with short sales. See the Nolo article Real Estate Attorneys and Home Purchases.

Are Short Sales Worth It?

Short sales are definitely extra work and hassle. Unless you’re going to get a property at a deep discount—even after adding up the costs of your real estate agent’s commission, repairs, and closing costs—and you have enough time to wait around for the bank to respond to your offer, you’re probably better off buying a house that isn’t conditioned on an unusual form of bank approval.

More Information on Short Sales

For a variety of useful articles on the subject, see Elizabeth Weintraub’s articles on short sales on About.com.

For the seller’s perspective on short sales, see the Nolo articles Short Sales and Deeds in Lieu of Foreclosure and Short Sales for Fannie Mae and Freddie Mac Loans.

And to learn about other creative alternatives for homebuyers, such as foreclosures and FSBOs, see Nolo’s Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart.

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