Buying a Short Sale House

A "short sale" generally means that a home is being sold for less than the owners owe on their house.  In many cases, the house is "upside down" in value, meaning the owner owes more money on the house to one or more lenders than it is currently worth.  Short sale homes don't necessarily have anything wrong with them; their owners simply choose to sell for one reason or another.  The following provides information about how to go about purchasing a short sale house:

Do not attempt to make a short sale purchase without representation by a qualified, licensed real estate agent with experience in short sale properties. An agent with experience in this area will be able to better help you navigate the short sale market and work with the sellers and their bank when the time comes.  Discuss any issues and/or questions with your agent before proceeding.  For your protection, it may also be advisable to obtain legal advice from a competent real estate attorney and discuss short sale tax ramifications with an accountant.

Be sure you have the required loan approval before making an offer.  You don’t want to miss an opportunity due to poor financial planning.

Work with your real estate agent to find homes that are being short sold by the owner.   Focus on properties where the owner owes a large amount on the loan and is in pre-foreclosure.   The owner does not need to be in default, i.e., to have stopped making mortgage payments, before a lender will consider a short sale.  However, if the owner is not paying their mortgage and owes more than the house is worth or would sell for, that property is a prime candidate for a short sale.  Short sales are required to be listed as such in the agent comments of the property listing that's posted to the Multiple Listing Service, so your agent will be able to identify these properties.  In addition, a seller must disclose if the home already IS a short sale or likely WILL BE due to the market value.  Remember, the listing agent represents the seller's interests, not those of the buyer.

One of the biggest complaints from buyers is that a short sale can take 60 days or more to close after an offer has been made.  When you find a property, even though the lender will probably require an "as is" sale, it is critical to view it and conduct a home inspection so you know what repairs will need to be made.  The bank wants the best offer, and the cleanest one, i.e., with a minimum of contingencies, so if you decide to make an offer, typically, the only contingency should be that the short sale be approved by the lender, with a set time frame for approval.

Work with your agent to ensure that all the necessary paperwork accompanies your offer.  Be aware that the owner has the right to reject your offer if he feels it is too low to present to his lender.  Even though a seller may accept your offer, it will ultimately be subject to approval by the lender.

The lender will probably send out an appraiser to evaluate the property in light of recent sales; in order to minimize their loss, they are also looking to determine market value, so don't expect that every short sale will be a great deal.  The owners and their agent may know the appraised value and what the bank is willing to take, but are not obligated to tell you.  There is a good chance that there will be more than one offer for a short sale home, so your offer will need to be as close to the appraised value of the property as possible.

Be sure you know your absolute highest price and be ready for counter offers from the lender.  If your offer is rejected, you can make another offer; however, do not waste time making offers with very small increases -- you may lose the sale.  Make a fair market offer.  A fair market offer still means you are likely getting a good deal and saving a lot of money on your purchase.  As an example, if the home is appraising at $300,000, the lender will likely take close to that, so if your offer is within roughly $25,000 of the appraised value, there should be a reasonable chance that your offer will be accepted by the lender.  Once your offer has been accepted, if your finances are in order, you should be able to close on the home within 30 days.