Homebuyers looking for a deal will likely come across a short sale property during their search for a home at some point. If you ever spot a listing price that seems too good to be true, call your agent and find out if it's a short sale. Here are the things you need to know about a short sale property.
What is a short sale?
A short sale is the name for the sale of a property that is owned by a bank, and that is pre-foreclosure. In a short sale, the current owners of the property have failed to keep up with mortgage payments for the property, and have as a result ened up owing more on the home's mortgage than the property is worth. In order to re-coup losses, the lending bank puts the home up for sale at a discounted price in order to entice a quick purchase by another qualifying buyer. Banks are usually especially anxious to sell a pre-foreclosure home quickly through a short sale, because a bank would prefer to take a loss on the original mortgage amount and move the property off their books, than to deal with the burden of having to unload the property themselves, or to suffer a bigger financial hit by placing the property in foreclosure.
Short sales are rarely "short" in time
A short sale, despite its name, typically takes much longer than a normal seller-to-buyer transaction because there are more parties involved in the transaction who all need to approve of the terms of the purchase. For instance, the primary lending bank must approve of the purchase, and so do any junior lien-holders (from a second mortgage) or tax lien holders. As a result, short sales often take longer than 30 days to close, sometimes stretching across several months, due to bank holdups (they may disagree with the negotiated sale price between you, the buyer, and the current owner, the seller) or the extra paperwork involved, mostly for the seller.
Additional complications of a short sale property
In addition to a lengthy purchase process, it is not uncommon to also run into the complication of the short sale property being in varying states of disrepair. With the seller in a tough financial spot and the difficulties of bank involvement, the property may not receive the "sprucing up" that typically happens prior to listing a home for sale. Although you might already be expecting a less than perfect home in a short sale, you do not want a home that has hidden defects due to neglect. To be safe, be sure to refer to a home inspection report to determine the "true cost" of buying the short sale property, and remember to factor the estimated cost of repairs into your own evaluation of the home.
Another complication unique to short sales is the situation where the seller has discontinued utilities prior to the inspection or final walk-through, because they cannot afford it and because they no longer live in the home. Utilities must be on in order for a home inspector to do a proper inspection of the home, so you might run into an added delay in the purchase of a short sale if you have trouble getting the current owner to re-activate utilities.
In sum, despite complications, short sale properties are still very attractive to home buyers because they are priced significantly less than other homes of similar size and style. However, it requires patience and due diligence to successfully purchase a property in a short sale. Whenever you are dealing with a short sale property, you should connect with an agent and real estate lawyer who have short sale experience.
QUICK TIP: If you are unsure if a listing you are looking at is a short sale, your agent can determine this by checking its public records to find out who's in the title, whether there's a foreclosure notice attached to it, and how much the lender is owed.