What is a short-sale?

Simply put, a short sale in real estate is a property being sold for less than what is owed on it. Usually this occurs when a home owner can no longer make their mortgage payments and they cannot even sell their house for what they owe on it. Their mortgage company will discount the mortgage closer to the current market value of the house so it can be sold.

The current home owner (the Seller) is able to walk away with minimal impact to their credit, well, at least less of an impact as, say, a foreclosure or bankruptcy might have. The Bank takes a loss but less of a loss than if the house had been foreclosed on and sold at auction.

If the Seller and their Bank can make the best of a bad situation, can a home Buyer benefit from this situation too? It seems like a Buyer should be able to get a screaming deal right? Maybe……

The Big, Bad Bank: With a short sale, the Buyer is, in essence, buying from the Bank (The Seller’s Mortgage Company). All aspects of the purchase, including the sale price, have to be approved by the Bank. This is no easy task. It can take weeks and even months for a Buyer’s purchase and sale offer to reach the right person at the bank that can make a decision and sign off on even just the price. Plus, if there are any other lien holders such as a HELOC (Home Equity Line of Credit) or an HOA (Home Owners Association), they too may have to approve the purchase and sale.

Also, there doesn’t appear to be a standardized process for short sales. Each Bank seems to be handling these types of sales differently and can even vary from sale to sale. Getting the right forms signed by the right people can be a nightmare, even for the most experienced real estate agent.  

Most importantly, the Bank may be willing accept less than what is owed to them but they are not likely to take much less than what they consider the current fair market value of the home to be. Their goal is to minimize loss not give away an asset, poorly-valued as it may be.

As-Is, No Buyer Credits, No Warranty: The Buyer is purchasing the home as-is; there is no warranty and there are no negotiations for repair credits. Often with home purchases, the Seller will contribute some amount of money to the Buyer as an incentive, for things like closing cost. If repairs are needed, a Seller might make the repairs or contribute back to the Buyer the cost to repair those items. Not so with short sales. This can be important in the long run. What condition is the house really in? If the Seller can’t afford their mortgage payments, have they been able to maintain the house?

Why not Buy New, Now: Most short sales can take anywhere from two (if you’re lucky) to six months (or more). During that time, what has the Buyer missed out on? Sale Prices on new homes can change from week to week. Buyer Incentives have become more and more creative. Interest Rates are as low as 1.99%.

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