What is a Short Sale?

A short sale is different from a foreclosure, which is when the seller’s lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.

#1 What makes a successful short sale?

  • Everybody has to believe that they are a winner.
  • The seller needs to know that they’ve gotten out of a bad situation with less credit damage and a new start.The buyer wants to make a purchase of a property below the true market value, at least in the near future.
  • The lender must believe that the short sale will net them more money than a foreclosure action.

#2 Here’s what you’re looking for as the buyer in a short sale transaction:

  • A homeowner upside-down in their loan. Their home is worth less than they owe on it in various mortgages.
  • Clear title and no prohibitive liens or claims against the property.
  • Enough time to complete the process before foreclosure action.
  • A willing seller with a desire to help in order to avoid foreclosure.
  • A current valuation that will allow you to buy the home at a bargain price, creating instant equity.
  • True hardship on the part of the seller to convince the lender of the necessity of a short sale.
  • If VA or FHA, the situation meets their criteria for short sale.

In short, you are looking for a homeowner owing more on their home than they can get in a sale, and a situation where the lender will approve a purchase price that meets your investment goals.

#3 You’re a good candidate for a short-sale purchase if:

  • You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes a minimum of two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.
  • Your financing is in order. Lenders like cash offers. But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
  • You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property—or you need to be in your new home by a certain time—a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.

#4 Some of the risks faced by buyers of short-sale properties include:

  • Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Or the lender could make a counteroffer, which will lengthen the process.
  • Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you.
  • No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits.

The risks of a short sale are considerable. But if you have the time, patience, and iron-will to see it through, a short sale can be a win-win for you and the sellers.

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