Though not as prevalent as they once were, short sales are still available in many metropolitan areas and the surrounding suburbs. Short sales occur when a homeowner sells their home for less than the total amount of the liens owed. It is possible that a short sale can occur and the seller pays the difference themselves; but, when we talk about short sales, we are usually referring to a situation in which the current lienholder(s) will accept less money than they are owed.
Obviously, lenders are not in the habit of accepting less money than they are owed, but they will do it if their analysis indicates that they will lose less by approving a short sale than they would by going through the long, costly legal process of foreclosing and re-selling the home. The catch is that the process to buy a short sale can be long and uncertain.
What are the benefits?
Despite the reputation, short sale homes that are in good condition do not typically offer a substantial discount over other homes. The agents and lienholders involved in these sales know what market values are, too, and it is unlikely that they’re just going to let a home go at a significant discount. The largest benefits really go to the seller, since they get to sell the home for less money than they owe. A short sale still has negative credit implications for them, but it is not as bad as a foreclosure.
The main benefit to you, as the buyer, is that you get to purchase the home that, presumably, you really want to buy. A home that otherwise would not have been available to be sold.
So how does it work?
In the beginning, buying a short sale is not very different than any other home purchase. You will put your terms together in the form of a purchase contract and send them over to the seller’s agent, who will present your offer to the homeowner(s). They may accept, reject, or counter your offer. Once you and the seller agree on terms, however, the contract must then go to all the lienholders on the home, who must also approve of the terms for the transaction to proceed. This is where it gets tricky because the lender’s decision could take weeks or even months. If their answer is no, you could potentially have several months invested in a process that ultimately bears no fruit.
Is there any way to make it better?
As a buyer you will not have much leverage to make a short sale work or not, but there are some things you can look for to protect yourself from a huge waste of time and disappointment.
First, ask if a short sale agreement has already been approved by the lender. Just because a home has been listed as a short sale, that does not mean that the lienholder has agreed to it. The seller can negotiate with their lender prior to listing the home or accepting any offers and gain a preliminary approval for a short sale. The lender still retains the right to approve the terms of the sale, but at least it is known upfront that they are willing to accept a short sale if the terms are agreeable.
If there is no prior agreement and you still wish to make an offer, wait, and hope the lender approves the short sale, ask if the seller is officially in default on the loan. While this may be an awkwardly personal question, it is extremely relevant. Rarely will a lienholder approve a short sale if the loan is not in default. Why should they accept less money if their loan is being repaid as agreed?
Finally, unless you are really not pressed to find a home and can afford to wait a long time for an unknown outcome, make sure your contract allows you to withdraw your offer without penalty and keep looking at other homes. Perhaps the short sale home is “the one,” but just maybe you will find a better one without as many question marks while you are waiting for an answer on the short sale. Keep your options open.