You’ve started your search for a new home. You’ve spent days scrolling through pages of listings online and you’re starting to think this whole exercise is a giant waste of time. Then you spot it – the house that checks off many of the items on your wish list and it’s listed at a price you can afford! It’s a dream come true! Or is it? That’s when you notice the status at the top of the listing doesn’t say “New” or “Active”, but instead says “Short Sale.” What does that mean? In a nutshell, the sellers can’t pay their mortgage. Rather than face foreclosure, they’re selling it for less than what they still owe. So what does that mean for you as a potential buyer? Basically, if you really want that house, you’ll want to buckle up for a long and possibly bumpy ride.
Short Sale vs. Foreclosure
It can get a little confusing for buyers (especially first-time ones) when they hear terms like “short sale” and “foreclosure” thrown around. As I briefly mentioned above, a short sale occurs when homeowners can no longer afford their mortgage. It can happen for any number of reasons – loss of employment, illness, divorce, family circumstances, etc. Or in some cases, poor market conditions made home values drop so much that people end up owing more than what their home is worth (this happened a lot during the recent housing crisis). Rather than missing payments, the owners have reached an agreement with their lender to sell the house for less than what they still owe. It’s not always a sure thing. In fact, some lenders don’t go for it at all. The seller has to give them written documentation showing that they can no longer make the necessary payments before any decision is made. It may seem hard to understand why any bank would agree to short sales since it means they are essentially agreeing to lose money. However, sometimes short sales can actually be cheaper for the banks than the alternative – repossessing the home in foreclosure.
Contrary to a short sale, a foreclosure is initiated by the lender. The specifics of the foreclosure process can vary from state to state, but it all starts when homeowners miss multiple mortgage payments (usually 3-6 months worth). The lender will then repossess and sell the home. In many cases of foreclosure, the house is already abandoned when the bank repossesses it. In other cases, the occupants have to be evicted. Foreclosures don’t usually take as long as short sales because the lender wants to liquidate the asset as quickly as possible.
Things to Keep in Mind
The lower price tag might make a short sale seem appealing, but there are some aspects of them that are not like traditional purchases. You’ll want to be aware of those before you dive in.
Longer Wait Time – Putting in an offer on a short sale requires a lot of patience. Short sales can sometimes take up to a year to process because you have to negotiate twice – first with the homeowner and then wait for final approval from the bank. And if the sellers have a second mortgage, then that additional lender will have to weigh in as well. The banks are not always in a hurry to give the go-ahead. Sometimes the listing price may be what the seller’s agent thinks the bank will accept, but the bank may have other ideas. They’ll likely want to do a market analysis before accepting any offers to make sure they can get as much as they can for the property.
Keep Your Options Open – Because the short sale process can be lengthy and unpredictable, you should continue your home search even if you’ve put in an offer on a short sale. Another great home could go on the market and then be scooped up in the time that you’re waiting to even hear back from the bank. You wouldn’t want to miss out, especially if you find a property that easier to buy under a traditional sale. Make sure to have your agent add a provision in your offer letter that lets you keep that flexibility.
Don’t Skip the Home Inspection – If you make it through the waiting game and start escrow, make sure you get a thorough home inspection. You likely won’t have much time to do it, but skipping it altogether would be a huge mistake. You’ll want to have a clear picture of what problems the house may have since many short sales are purchased “as-is”. The good news is short sales are usually in better shape than foreclosure properties (which sometimes get trashed as a way to retaliate against the bank). However, because of the seller’s financial situation they may have had to put off some necessary maintenance and won’t be able to afford any repairs. And it’s unlikely the bank will drop the asking price to cover any repairs. You should structure your contract so that you can back out if the inspection uncovers major problems.
The Bottom Line
Purchasing a short sale isn’t all bad, but you want to go into it with your eyes wide open. If you have the time, patience, and resources, it might be a great option for you. You’ll want to work with an experienced agent who knows the ins and outs of the short sale process, as it is more complicated than a traditional sale. However, if you do your homework and are willing to wait, you just may find a good deal on a great home.