A short sale can be a good way to get the most bang for your home-buying buck – but it’s not always an easy proposition, and it’s far from the magical way of automatically snaring a great house “on the cheap” that some people think it is. Yes, you can end up getting a bargain on a home – but the process can be both arduous and frustrating. In some U.S. markets only one in 10 short sales actually goes to closing. So as with most things, there are both pros and cons.
Short sales are home purchases in which a home is sold for less than the amount the current owner owes his or her bank or mortgage company; the proceeds from the sale are below the amount the seller needs to pay the mortgage off and cover the costs of selling.
On the pro side, home buyers going after short sales have been known to close on homes at prices significantly below their market value – undeniably a good thing from any purchaser’s point of view. And a short sale can also be good for the seller, too: it technically helps him avoid having a bank foreclosure foul his credit rating. Lenders will sometimes be willing to record the transaction with credit bureaus as “paid in full.” This type of short sale is a win for all concerned.
On the negative side, however, there are procedural hurdles involved in a short sale that must be considered by home buyers.
Length of timeGenerally, home-purchase deals involving short sales take significantly longer to close. The deals are inherently more complicated because they involve more players. For a short sale to close, every party to the transaction who is owed money – there may be several mortgages on the property involving not only primary mortgage-holders but secondary or “junior” lenders – must concede to accepting less than the amount they are owed, and in some cases, to settle for nothing at all. This is the principal reason that short sales often fall through.
Home conditionBecause many short sales are a step away from full foreclosure, some short-sale properties have been vacated and empty for quite some time, and have fallen into neglect. And obviously, cash-strapped owners will not have spent money doing upkeep or even basic maintenance. In extreme cases, disgruntled and financially distressed owners, before moving out, will take out their anger and frustration on the home itself, vandalizing floors, walls or plumbing. Bottom line: a large percentage of short sales are fixer-uppers to say the least.
“As Is” salesTraditional “disclosure statements” provided to home buyers reveal issues such as whether a house lies in a flood plain, has termite damage, or has undergone renovations without proper permitting. But some short sale and foreclosure properties are sold on an “as is” basis, without disclosure. The onus is on the buyer or the real estate agent to research such issues through local planning departments, and even consulting with neighbors in the area.
Some banks are overwhelmedBecause of the flood of foreclosure properties in certain areas of the country – Florida and California, notably – some lenders are swamped with the sheer number of foreclosures with which they’re dealing, and it can take weeks or months for them to get around to dealing with a short-sale offer. They can be frustratingly slow to respond, and there’s little buyers can do to speed things up.
No free lunchSome home-shoppers are under the impression that if a deal is a short sale it’s automatically going to be a steal. Not so. Banks have taken losses on mortgages in recent years, and most are determined to maximize their take from short-sale deals. Few are willing to let a house go for next-to-nothing.
Knowledgeable agentsNot all real estate agents are familiar with the complicated ins and outs of short sales – or have the patience, fortitude or interest to see them through to closing. If you’re considering getting involved in a short sale, make sure your agent has a good track record with them.
The clock is tickingShort-sale properties are generally on a foreclosure schedule, and, as the short-sale deal is being negotiated, time is marching on. Many a short-sale deal has failed to come together in time to avoid the property going to auction.