What is a short sale?
A short sale occurs when a property is sold at a price lower that the amount the homeowner owes on the mortgage, and the homeowner’s mortgage lender or lenders agree to the “short” payoff. The important thing here is that the lender or lenders must agree to the short sale.
How can a home end up as a short sale?
The homeowner may be unable to continue paying the mortgage or the market value of the home could have decreased below the amount of equity the seller has in the home and the homeowner is not able to make up the difference. The homeowner is better off selling as a short sale than waiting for the bank to foreclose because the impact to the homeowner’s credit score is usually not as bad with a short sale as with a foreclosure. The bank also avoids the process of foreclosing and reselling the home.
How can a buyer tell if a property is a short sale?
The easiest thing to do is to ask your real estate agent, who has access to databases which provide such information. Property listings may also provide this information but not always. A buyer should look for wording such as: “third party approval required”, “lender approval required”, or “subject to bank approval”.
What are the downsides of buying a short sale versus a traditional sale?
There are many issues with buying a short sale that buyers must be aware of up front when deciding if a short sale purchase is for them.
- The list price may not be the price. Often a short sale property is listed before the bank has approved the price. There is the possibility that the buyer will make an offer and the seller accept it only to have the bank come back with a higher price.
- You are on the bank’s timeline. Once the offer is submitted to the lender, it typically takes 1-2 months to get a response from them, but it can take up to 9 months or even longer to get a response. Then once approved, the lender will want the property to close quickly. This uncertainty in timing can be an issue for buyers especially if they need someplace to live.
- You need to bear some risk up front before you even know if the lender will accept the offer. While you are waiting for the lender’s response, you will still incur costs associated with the transaction such as attorney’s fees, the property appraisal for the purchase mortgage, and inspections.
- The home is sold “as is”. Having made the decision to short sell their property, it is unlikely the sellers will make necessary repairs and lenders usually do not negotiate inspection items.
- Some financing options may be difficult with a short sale. An FHA loan in particular may be difficult in buying a short sale because there could be issues such as peeling paint, asbestos, missing roof shingles…etc that an FHA appraiser notes. These would then have to be fixed for the FHA loan to close. If a home requires significant work, a renovation loan such as a Fannie Mae Homestyle loan or an FHA 203K probably makes more sense. Talk to your mortgage broker before making an offer on a short sale to make sure financing won’t be a problem later.
Thinking about buying a short sale, talk to me. Here is a review from a client who recently purchased a short sale through me in Montclair.
We are so grateful to have had Diane Russell help us purchase our lovely home in Montclair. We had been working with Diane for about a year before we first saw our house. It was listed as a short sale shortly after we made our first of many offers on it. We knew that this was going to be a complicated process. We were told that there were no guarantees that we would even get the house and there were several risks involved in pursuing the house. Despite the potential for loss, we really loved the house and felt confident that Diane would help us do everything possible to make it work. Diane worked diligently for over six months to make sure that we had the best chance of purchasing the house. She was consistently optimistic and patient and used her resources to assess the risks involved and figure out what we needed to do to buy the house at the right price. She was steady, professional, and effective when communicating on our behalf with attorneys, banks, the seller’s representatives, inspectors, contractors, and the town of Montclair when necessary. She was always responsive and willing to answer any questions we had throughout the process. We highly recommend Diane to anyone looking to purchase a home in the Montclair area.
-Elizabeth Cornwell
For more information or to talk to me about buying a short sale, e-mail me at dianeirussell@yahoo.com or call me at 201-463-3754.
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