With the rise of foreclosures after the housing market crisis, the term “short sale” has become more popular than ever. The sticker price of short sale homes can be very alluring to house hunters who are looking for a bargain.
While some short sale purchases can be a great investment, many also come with more than their fair share of hurdles, pitfalls, and even risks, making some buyers better suited for them than others.
Find out what makes you a good candidate for a short sale and if it’s right for you.
What’s the difference between a short sale and a foreclosure?
Short sale and foreclosure homes are often mistaken as virtually the same, but they’re actually pretty different.
In the foreclosure process, when a homeowner defaults on their mortgage, the lender takes control of the title of the home and sells it directly. With a short sale, homeowners are very much involved and are usually trying to sell the home fast in order to avoid going into foreclosure by working out a deal with the bank.
A short sale still affects the credit of the seller, but not as heavily as a foreclosure. Short sale sellers have the ability to take out another home loan in as little as two years, but a foreclosure can weigh down your credit for up to 10 years.
What are the advantages of a short sale?
Even though they’re still taking a loss on the property, lenders generally prefer short sales over foreclosures because they end up losing less. Foreclosing on a property is an expensive endeavor because the lender has to evict anyone living in the home, pay the taxes on the home and maintain its condition until it sells. It also becomes susceptible to liability issues.
So, even though it can be a frustrating process, a successful short sale usually ends up being a win for everyone involved. The homeowner avoids going into foreclosure, the lender keeps the burden and expense of foreclosure off of their backs, and buyers get a property that hasn’t been abandoned for a bargain price.
What makes you a good candidate to buy a short sale home?
Don’t be fooled – short sale homes are not the fast food drive-thru of the real estate world. It’s a complicated process that can frustrate even the most qualified person. Being a good candidate for a short sale home will not mean that the process will go smoothly–it just means that you have a better shot in coming out on top.
A few questions to ask yourself to determine whether you’re right for a short sale home include:
- Are you patient? If everything goes well between you and the seller of the home, the lender then has to agree to work with you. Once the lender agrees, negotiations on the price of the home begin. This is why a short sale can take anywhere from four to nine months. And if the home is under two mortgages, it could take even longer while lenders sort out paperwork. If you’re not a patient person, you will find a short sale home frustrating to say the least. Many buyers end up walking away from short sales after dealing with too many hassles.
- Are you selling a home? If you have a house to sell before you’re able to close on a new home, then chances are that a short sale home is not the best move for you. Likewise if you have a specific timeline in which you need to be in the new home. The variables in the short sale process are just too great to be able to dependably identify the date on which you’ll be able to move. And if the short sale falls through at the last minute, you could find yourself unexpectedly homeless.
- Can you pay in cash? Obviously paying in cash isn’t an option for everyone, but it is always the most desirable in any sale, especially to the sellers and their lenders. When you’re able to pay up front instead of dealing with mortgage companies and lenders, your bid will almost always take precedence over any other financed offer.
- Are your finances ready? This is a question to ask any time you’re buying a home, of course. But, the short sale process is so fickle, even the slightest discrepancy on your credit can lead to the lender rejecting your application. Fix any issues you might have on your credit prior to taking on a short sale, no matter how insignificant they might seem.
How do you get your short sale offer accepted?
If you’ve taken the necessary steps to ensure your credit and finances are in order, done your homework on short sales and the property in question, and still want to move forward, then it’s time to get serious. Short sale homes can often receive a large number of offers, but there are ways to make sure yours is taken seriously.
- Don’t bid too low. Yes, the major perk to a short sale home is the slim price tag. But remember that the lenders are interested in getting as much back on their investment as possible. Putting in a bid that is significantly lower than what the home is worth is a quick way to get your offer shot down. Many banks will take offers that come within 10 percent below the listing price into consideration, but any more isn’t the norm.
- Build the seller’s confidence in you. Short sale sellers are expecting people to walk away from the sale at one point or another. Reassure the seller that you’re serious about your bid and that you have what it takes, both on paper and in patience, to make it through the short sale process. Having confidence in you is a big step in having a seller take your bid to the lender.
- Have your preapproved letter ready. Another way to build confidence between you, the seller, and the lender is to have your preapproval letter from a reputable lender ready to go. Don’t wait for them to ask you.
- Agree to pay the seller fees. A common mistake made in short sales is for buyers to request the seller to pay the fees that are normally paid for by the buyer. This is a common practice in traditional home sales, too, but short sales are much more fickle. If you agree to pay at least part of the fees and closing costs that the seller typically pays, your bid will definitely get noticed.
- Put your deposit in a trust account. Some short sale real estate contracts request the earnest money deposit to be placed into a trust account upon approval. This shows the seller and the lender that you’re serious and willing to put your money where your mouth is.
What are the disadvantages of buying a short sale?
In most short sale cases, the homeowners still live at the property and are trying to get out from under their mortgage. But this doesn’t necessarily mean that the house is in good condition. Short sales are sold in “as is” condition which means that as the buyer, you can’t ask the seller to make any repairs or upgrades as part of the sale.
Sellers are forced into short sales because of financial hardships which usually means that maintaining the home probably hasn’t been top priority. Short sale homes often need significant repairs and upgrades. Always get a home inspection before closing on a short sale and factor in the cost of work you will need to put into it. Depending on just how much improvement the home needs, that bargain price can quickly look like a money pit.
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