Real Estate & Personal Finance: Will I Save Money if I Buy a Short-Sale Home?
Why Lenders Agree to Short Sales
By definition, a short sale means that the lender isn’t going to get back all the money it loaned for the property's original purchase, because the home is no longer worth that much. If the lender fronted Joe Homebuyer $300,000 to purchase the property and then the economy hit a rough patch, Joe might still owe $275,000 while the home's fair market value has dropped to $250,000. Meanwhile, the economy – or something else, such as illness or divorce – has affected Joe's income as well, making it difficult or impossible for him to continue making mortgage payments. The lender has just a couple of options. It can foreclose, but this is probably going to involve some significant time and expense, and in the end the lender might end up owning the property. Alternatively, the lender can agree to a short sale and allow a new buyer to purchase the home for less than the balance of the existing mortgage. It's not an ideal solution, but it's usually less problematic for the lender than foreclosing.
The Seller And You Must Qualify
A seller must typically meet myriad requirements before his lender will agree to a short sale. He must have missed at least one mortgage payment, and he must convince the bank that he's suffered a hardship that makes it unlikely he'll be able to catch up and get back on track. Buyers must effectively qualify too. This involves submitting detailed paperwork to the lender so it accepts your offer rather than someone else's, because there may be multiple bids. Both the seller and his lender must agree to your offer, and Realtor Bob Hunter says that the approval of any junior lienholders -- for example, a lender who holds a second mortgage on the home -- must be secured as well. In exchange for all this trouble, you should expect to purchase the property for something close to fair market value -- in other words, you'll pay about as much for the home as you would for a similar home sold at a traditional sale.
There May Be Hidden Expenses
It's usually wise to do a little reconnaissance before you make a bid on a short sale home. "All short sales are sold strictly as-is," Hunter says, "meaning the buyer is responsible for all certifications and all repairs that may be needed. These may or may not be extensive, depending on how long the home has been sitting on the market." Arrange for a home inspection, Hunter advises. You can usually void the contract if it turns out that there are major structural problems. Otherwise, you'll have to pay for any work yourself, and this could put a big dent in any savings.
You might also want to do a title search before you get involved in bidding on the home. This will turn up any hidden encumbrances against the property. If the owner can't pay his mortgage, it's possible that there are other loans or taxes he couldn't pay either. These may create other liens in addition to first or second mortgages. If they're substantial, you might not save by buying a short sale at all. They'll block the sale unless they're paid off at closing, and it's not likely that the seller or his lender will foot the bills. You'll have to come up with the money to clear title.
You'll Need Ready Cash
Acceptance of your offer can take a while. "My experience is that most short sales take 90 days to six months to get to closing, much longer than advertised," Hunter says. But after your offer is accepted, things can proceed very quickly. You may have as little as 20 days until closing. If you don't have deep pockets or a lot of available cash on hand, you might want to prequalify for a mortgage before shopping for a short sale, so you have the financing in place. You'll also need earnest money, just as you would for any other sale, and neither the seller nor the lender in a short sale transaction is likely to pay the seller's closing costs. You may have to pay these as well, which will be another expense to consider.