What is a Short Sale?
A short sale is when a bank or lender agrees to accept a discounted payoff on a loan because the home owner owes more on the property than the home is currently worth. To qualify, the seller must prove economic hardship.
Why Buy A Short Sale?
In a short sale the seller still owns the home, but owes more than they can sell the home for. Often they are behind on their mortgage and the lender has begun foreclosure action. It is called a “short sale” because the lender will have to agree to accept less than what is owed in order for the sale to close. In most, cases due to the pending foreclosure, there is a time factor to race the lender to get the home sold before the home forecloses. Usually, once there is a valid offer on the home, the bank will push the foreclosure date back, if one has been scheduled..
Lenders are often letting short sale homes go from 10-28% less than their current market value. They do not base their decision on the original purchase price of the home or on the balance of the loan(s), but on what the current comparable sales show they would be able to sell the home for.
The bank will net out all costs including Realtor fees, title fees, liens (that they agree to pay) and back HOA fees, to name a few and will make a decision based on the net profit.
There are a couple down sides to putting an offer in on a short sale.
- They take a long time to get an approval – a typical time-frame would be from 2 months to a year – with 6 months being a good estimate.
- Many times the owners have run out of money and moved out of the home and there are not utilities for inspections. Typically, we negotiate an early lease, at no cost – so the buyer can have the utilities turned on in their name for inspections.
- They don’t always get approved – sometimes the bank uncovers liens or other costs they are not willing to pay for and the owner can’t afford to pay them.
- Periodically, we get a bad appraisal that doesn’t take into account the market factors that have caused the home to sell at such a discounted rate and we have to jump through hoops to get a new appraisal done.
- Sometimes the bank forecloses on the home, even though they have an active offer. Depending on who their underwriter is, they may not be able to push back the foreclosure long enough to get us to closing.
Short sales are great for investors because they need a great amount of patience and you have to be in no hurry. On the other hand, many owner-occupants are being patient and enjoying the write offs the banks are willing to take right now.