A short sale is a property that has been sold back to the lender for less than the amount of the remaining mortgage. They usually occur when the borrower defaults on a loan, but it can also occur for other reasons — like if the owner dies and the heirs need to liquidate the estate.
Buying a short sale property could seem like a good investment – after all, you could potentially get a property at less than market value – but short sales, or buying below replacement cost, also come with their fair share of headaches.
The lender has to approve the short sale before you can close the deal on the property. In the meantime, a realtor could list the property as a short sale, even if the lender has not yet approved the sale. If the lender never approves the sale, you could lose the property or be liable for the difference at closing. Even if the lender does approve the short sale, they could negotiate last-minute changes to the contract raising the price of the property, or changing the terms of the sale.
Once you make an offer on a short sale, it can take weeks to months for you to hear back from the lender. Even if the lender responds quickly to the offer, it could still take months for you to actually close on the property, especially if there are several lenders involved. If you are purchasing an investment property, this might not be an issue. But if you are changing residences, you could end up homeless if your old home sells and closes before the short sale. Conversely, if you wait too long you could end up paying two mortgages until your old home sells.
Short sales are difficult and require a lot of research, follow-up, and paperwork. Not all realtors are experienced short sale agents, and they might not have the skills and knowledge to protect your interests. One missed form could make the difference between closing on a property, or losing the sale altogether.
Sometimes a property goes into short sale because the value has dropped far below the original loan amount. This could mean that the house was initially over-valued when the loan was written, or that the market has dropped considerably.
Additionally, short sales are usually as-is. This means that you, the buyer, can’t negotiate for repairs or improvements to the home as part of the contract. This also means that the lender will refuse to pay for repairs or deferred maintenance if a pre-sale home inspection reveals a problem.
So, while a short sale seems like a great deal on paper, you could be purchasing a property at market value, and get saddled with additional repair and upgrade expenses.
If you are planning to buy a short-sale property, be sure to do your homework first.
Check the auditor and tax sites to determine the true title holder, the lienholder, and the mortgage amount. Contact the lender to make sure the property has been approved for short sale before you make an offer.
Find an experienced short sale agent to broker the deal, even if the property is listed by a different agent.
Insist on an inspection before you close, and make the offer contingent on the results of the inspection.
Only consider a short sale for an investment or rental property. That way, if the deal falls through, or there is a delay in closing, you won’t be stuck between residences.