What is a Real Estate Short Sale?

All About The Short Sale Home

Whether it’s your first home you are purchasing or your second or third, buying a home is a lengthy, intimate process.  If you’re buying a short sale, it can be even more involved, ranging from simple to complex.  That’s why it is so important to really understand everything about the short sale process.

What Is a Short Sale?

In brief, a short sale purchase isn’t that different from buying any other home.  It is, however, different for the seller, which can certainly impact you as the buyer.  The seller is essentially “short” on paying the remaining mortgage they owe, so the bank and seller agree to list the property for less than what is owed on the mortgage.  The bank will then forgive the remaining debt owed by the seller.  Usually this is a win-win for both the seller and the bank.  But, there can be problems.

Before we dive into everything short sale home buying, let’s review the pros and cons.  Sometimes knowing this information ahead of time can help us to make the best decision possible.  We will get into the exact details in a bit.

Overview of Pros and Cons of a Short Sale

Lower price than other comparable homes.The process can take a long time.
Less competition with other buyers.The house is sold as-is.  Home inspections are crucial, but no repairs will be made.
It can be less risky than a foreclosure sale.Mortgage lenders get the final approval.
Higher resale value 

Now that we have a general overview of the pros and cons of a short sale purchase, let’s talk about the specifics.  When you are considering this type of home, whether it’s for you to live in or it’s an investment property, it is always a good idea to weigh your pros and cons before making any kind of decision.

Let’s get into all the advantages of buying a short sale home.

Pros of Buying a Short Sale Home

It’s cheaper.

When you are looking at the price tag of any property, a short sale home can be extremely desirable.  Every other home on the same block or neighborhood has a much higher price point.  This can be a very lucrative investment as long as you’re willing to put in some sweat equity for repairs and cosmetic features.  And if the repairs are minimal, your resale value can increase a sizable amount.

You won’t have to compete with other home buyers as much

When a house goes on the market, and it’s got everything buyers are looking for, it can be a cut-throat situation.  You need to put in an offer that’s reflective of your financial situation but it also needs to be the very best one so the buyer accepts it.  With a short sale purchase, many people tend to overlook it because it does require a bit more effort and will not be “move-in” ready.  This can be extremely desirable for you as the buyer.

It can be a more secure purchase than a foreclosure

In most cases, the owner of the home is still living in the house, unlike in a foreclosure.  So, the resident usually will not destroy or neglect the property.  While the homeowner may have not maintained the property, it can be assumed that the premises is still somewhat livable.  The fact that they’re still occupying the house will also keep vandalism to a minimum, which has more potential in foreclosure properties.

Higher Resale Value

When you buy a short sale home, you are getting a whole lot of house for very little money.  This is one of the biggest reasons anyone is interested in buying a short sale.  For example,  you purchase a short sale home for $300,000, and the home is in a residential neighborhood that boasts great schools.  Plus, there are several other homes on the very same block with asking prices of $350,000.  With a bit of work on your end or a contractor’s, it doesn’t take much to see the potential for a great investment.  You’ve just created a nice return on your money.

Cons of Buying a Short Sale Home

The process is long

A lot of times buyers think they are getting a good deal because the price is so cheap.  But, the process can be lengthy, sometimes even up to a year or more.  In a typical buyer-seller situation, the only person who needs to accept an offer is the seller.  This is not the case for a short sale.  It’s the bank and the mortgage lender who make the final decision.  And the reason it takes so long?  This is because the bank doesn’t have to agree to any price.

For example, say you offer $300,000 and the homeowner agrees, but the bank holds out for better offers and rejects yours.  Because the bank is holding the house, there is very little flexibility.   As long as you don’t mind waiting, and you aren’t in need of moving, this can be a win-win situation.  Truly, this is best suited for people who do not have an immediate need to move or do not have to sell their own house to move.

The house is sold as-is

Not all short sale homes are created equal.  Some can be pristine with very little changes needing to be made while others will need a ton of work.  Therefore, inspection needs to be thorough because, in some cases, the homeowner may have not maintained or kept up with the property.  If they’re having trouble making their mortgage payments, how much upkeep is actually happening?  It’s safe to assume there weren’t many improvements being maintained.  Which is okay, as long as your inspection doesn’t uncover any serious issues. 

Just remember, there will not be as many niceties that usually happen in a buyer-seller situation.  Sometimes the seller will cover closing costs, but that won’t be the case in a short sale transaction.  And even though you are getting the house inspected, there won’t be any repairs made.  The inspection should be informative only with a contingency on the offer so that if there are any major issues, you can cancel the sale.  That way you can be rest assured that your offer is more secure should it be accepted by the bank.

Mortgage Lenders Have the Last Word

Even after putting in an offer and it’s accepted by the homeowner, it also needs to be approved by the mortgage lender.  They’ll be looking for a certain amount since they are taking a loss on the loan.  The seller will be more eager to accept offers that are even ten, twenty percent less than asking price, but the bank will give little leeway in this area.  The homeowner just wants to get out of this debt, but that doesn’t mean the lender will be as willing to quickly take an additional loss on the loan.  This is why the process can be so time consuming with a short sale home.  The more people involved; the more frustrating it can be.

My Offer Was Accepted, Now What?

So now that you have an understanding of the pros and cons of buying a short sale, you are ready to make the leap.  Your offer has been accepted after some time.  Now you are probably wondering how long you will need to close.

Average Short Sale Timeline

The offer is received and signed and then sent to the bank.  On average, after the bank receives the offer and accepts it, the home enters into escrow.  That means the lender, or lenders in the case of multiple mortgages or home equity lines, have approved the minimum net proceeds the bank must receive from the sale.  Best case scenario:  this process can take around 60 to 90 days. 

However, it truly is difficult to say an exact timeframe.  As a buyer and a seller, especially in a short sale situation, you want to close as quickly as possible.  The waiting game can be tricky for some people.  If you’re the kind of person who needs answers quickly, then it’s important to consider your personality when you’re looking to buy a short sale home.  Initially, some people have no problem waiting for as long as it takes.  This can change quickly when time starts to lag after an accepted offer.  When a buyer isn’t hearing much from the seller or the mortgage lenders, that’s when things can take a turn.  It tends to make others uncomfortable and causes them to get out of the contract. You must have patience. 

During this time, the home will be inspected for certain issues, like termites, roof condition, and plumbing and electrical systems.  Even if things seem to be going well, it’s just as important that your realtor keeps the lines of communication open after an offer is accepted.  Oftentimes, the lender will tend to misplace offers.  Things seem to get lost during the long waiting periods, which means that your realtor needs to be keeping accurate notes on the process.  A realtor who is well-versed in short sales can help keep the process more streamlined if they are able to hold the bank accountable.

There can be a variety of reasons why there are longer escrow times.  If there’s a short sale that is fairly simple in terms of its package, things can close in a matter of months.  That’s only if the property is located in a great area with only one mortgage defaulting and zero back taxes.  If it’s just the mortgage that’s defaulted, the short sale will be processed quickly.

On the other hand, there could be a more complex file with more than one mortgage against the property and a few different taxes and or water bills against it.  Now this file is much more involved.  The two lenders are now going to be negotiating what to settle on which only means more time for you as the buyer.  So naturally, this is going to take much longer.  It could be six to nine months, or even a year.

Of course, every short sale transaction and experience is different, but these are just a few of the things that can happen.  And most likely they will happen if you decide to go for a short sale home.  It can be worthwhile to some, or a complete waste of time for others.  Keep in mind who you are as a buyer and what makes you feel the most comfortable.  That way, you will feel confident and self-assured when it comes time to make the jump.

Whether it’s your first time home buying or an investment opportunity, a short sale home is an exciting venture.  For the more flexible buyers, it can be a great experience.  For others, that may be impatient it can be terrible.  While it can be a worthwhile investment in the long run, many buyers get frustrated with the waiting game and lack of response from the mortgage lenders.  The property is usually at a lower price than the other houses on the same block and neighborhood, but it will usually require more work, time, and energy.  It probably will not be move-in ready, but with some work (or hired help), there is a possibility of big return on your investment when it comes time for resale.  Just keep the lines of communication open with your realtor and make sure they also keep the lines open with the lender.  This is why in all transactions it is so important to have a knowledgeable realtor.  It truly is about the bottom line for some people, so make sure this is something you want to invest in with your time, energy, and cash.

If you would like to talk to a realtor in the Great Lakes region where I personally invest, click the contact page and let us know how we can help.

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