Buying a Short Sale Home

When buying a home, you may notice that some properties are listed as short sales. When a listing is labeled as a short sale, it means that the seller’s lender is willing to accept a discounted payoff in order to release the existing mortgage on the property. 

In such a transaction, the lender agrees to accept an amount that is less than what is owed on the mortgage. The sale benefits the lender because it allows the lender to avoid repossessing the property in foreclosure as this is not only expensive, but also time-consuming. The seller also benefits from the sale as it allows them to avoid creating a poor credit record that may come with a foreclosure.

When buying a short sale home, there are several important things a homebuyer needs to know:

How short sales work

The lender does not own the home in a short sale. However, it will seem as if the buyer is buying the property from the bank because the bank will approve the sale. Although buying a short sale home is similar to a traditional purchase, there are some few differences in how the purchase agreement between the buyer and the agent is drafted. While the only party who needs to approve the sale in a normal transaction is the seller, a short sale contract has to specify that the terms are subject to the lender’s approval. Additionally, the contract has to state that the home is being purchased “as-is”. 

The buyer is also allowed to include language in the agreement that allows him/her to back out of the deal if an inspection of the property reveals considerable problems. However, the general rule is that the buyer should not expect the lender to reduce the price in order to account for any repairs. It is also unlikely that the bank will make any repairs, and the seller is even less likely to assist because they are often short on cash. The buyer needs to make that they have enough money for the closing costs.

The waiting game

If you’re buying a short sale property, be prepared to play the waiting game. Banks/lenders are notorious for taking a long time—up to several months in some cases—to respond to an offer on a short sale. In order to limit the wait time, experts recommend that a buyer should give the lender a deadline. Although it’s not clear if the strategy will push the bank to act fast, it is worth trying for those who can’t stand the stress of waiting for months to get a response. Nevertheless, if the bank has not approved the short sale at the time the buyer is making the offer, it will be useless to implement a deadline because it may take a couple of months just for the lender and the seller to reach to an agreement. 

Weighing the benefits

Experts can’t agree on whether a short sale is a good deal for the buyer. Some believe that short sales are often priced below the market value, which creates an opportunity for the buyer to get a good deal or for a first-time home buyer to own a home when they otherwise might not be in a position to afford one. Others say that lenders don’t have an interest in selling property below market value and will conduct a comparable analysis before accepting a price for short sales.