In a short sale transaction, a mortgage lender gives a seller permission to sell his house for less than what’s owed on the mortgage. If the seller needs to sell quickly because of financial problems, a divorce or other issues, a short sale is one way to unload the house faster and avoid a foreclosure.
When purchasing a short sale, you can potentially save money. But don’t immediately jump at the idea of buying a short sale property. Here’s what you need to know about these types of transactions.
1. Work with an experienced short sale real estate agent
A short sale transaction is unlike a traditional real estate transaction. There's no rule saying you have to work with an agent who has experience in short sale sales, but you can’t go wrong with a knowledgeable agent by your side.
Short sales have to be approved by the seller’s mortgage lender. Given the complexity of these types of sales, plus the additional paperwork and negotiations, you need a realtor who can guide you through the process from start to finish. And unfortunately, not every agent is an expert in dealing with the ups and downs of short sales.
When interviewing potential real estate agents, not only should you ask about their years of real estate experience, you should also ask about their short sale experience. How many of these transactions has the agent been involved in? Has the agent represented sellers in these transactions? You’ll have questions throughout the process, and you need a realtor who can offer satisfying answers.
2. You’re buying the property “as -is”
Some sellers request a short sale because they can no longer afford to pay their mortgage and they want to avoid foreclosure. Sellers who experience economic hardship often do not have money to improve or fix up the property. If you’re thinking about buying a short sale property, understand that you're purchasing the property “as-is.” Unlike a traditional sale where you can ask a seller to make improvements, this isn't common with a short sale.
3. Buying a short sale doesn't guarantee instant equity
Sometimes, you can save money buying a short sale property. This happens if you purchase the property at a price below market value, but this doesn’t alway happen. Some short sale buyers assume they’ll be able to purchase a house dirt cheap and move in with instant equity. But in some cases, the seller purchased the property during a housing boom and was a victim of overinflated home values. And if property values in the area have come down in recent years, the short sale price will most likely be comparable to the true market value of the home, which is based on recent sales in the area.
4. You might have to pay your own closing costs
In a traditional real estate transaction, you can ask the home seller to cover all or a percentage of your closing costs, or you can work out a deal with your mortgage lender. Some banks will pay a buyer’s closing costs if the buyer agrees to a higher interest rate, or the bank may include closing costs in the mortgage loan. In both scenarios, you only have to come up with a down payment for the home purchase, which can save you a ton of money. It's quite different when purchasing a short sale property.
Since most sellers deal with financial hardships, they don't have cash to contribute to the closing costs. And since the mortgage lender accepts less than what’s owed for the property—thus taking a loss—the bank isn’t going to toss in any incentives, such as paying your closing costs. As the buyer of a short sale, be prepared to pay these costs from your own pocket, which can be between 2% and 5% of the loan balance.
5. Be patient
A standard real estate transaction takes about 30 days to complete. A short sale transaction, on the other hand, can take up to 90 to 120 days to complete. As a short sale buyer, you have to be patient and wait for the deal to close. The bank will not consider a seller’s request for a short sale until “after” there’s an offer on the house. The approval process begins from here, at which time the mortgage lender will request document from the seller to see if he’s eligible for a short sale. This takes time, so a short sale isn’t the right choice if you’re looking to buy and move into a house within the next one or two months.