Should I Buy a Short Sale Property?

11705577525_7b79067e1eImage Source: Mark Moz

In years gone by, many potential home buyers had the impression that homes labeled “foreclosures” or “short sales” were dumps or money pits. Think: Major Fixer Upper.  Most buyers steered clear of those listings, and they could easily do so because homes listed for sale were aplenty.

These days more people who are in the market for a home have a much better understanding of what a short sale home actually means, and more people are willing to, and sometimes specifically aiming to purchase a short sale home.

Even with the increased interest in purchasing short sale properties in the new millennium, there are still an overabundance of misunderstandings and misconceptions when it comes to shopping for a home that, by name, is a bit of a misnomer.  Reason being: short sales are anything but short.

The big question, then, is: if they take so astonishingly long to settle, WHY ARE THEY CALLED SHORT?

Therein lies the misnomer and the misunderstanding. These transactions were named due to a money short, not a quick sale. They occur when the previous (or current, depending on how you look at it) homeowner has faced a financial difficulty of some kind. This may be due to a divorce, job loss, job transfer, illness or some other unforeseen obstacle. The hardship forces the homeowner to sell their home for less than it’s worth, and less than they actually still owe to their bank or lender.

In order to increase their odds of selling the home due to necessity, the homeowner asks their lender to accept less money than they owe on the loan. If the lender agrees to accept, say $150,000 instead of the $200,000 they are owed, they are being “shorted” $50,000. Hence the name: SHORT SALE.

Why and how does this affect you, the buyer? Sure, you very well may get a decent property at a substantial discount. Additionally, since the lender has already taken a financial loss on the home, they may even offer you a very attractive interest rate. After all, they are eager to make up some of the money that they’ll lose on the transaction. It may seem counterintuitive for lenders to willingly take less than what they are owed, but as foreclosure as the alternative, a short sale looks desirable in comparison.

Another plus of seeking out a short sale property is that you will have the cooperation of the sellers. Unlike a property in foreclosure, short sale sellers are eager to make it a done deal. That’s why their home is in a short sale in the first place.

Conversely, if you are considering purchasing a short sale property, you will not be able to go it on your own. It is extremely important that you work with a real estate agent or attorney who has significant short sale experience under his belt. Many realtors just cannot handle short sale situations well. They require a great deal of  steadfast perseverance and the ability to remain calm yet determined when dealing with difficult or uncooperative lenders. So, you may be looking at attorney’s fees, but keep in mind the steep deduction in the price of the home and you will quickly realize that the savings greatly outweigh the cost of a good attorney.

Several other things to consider include:

  • The property may be in various degrees of disrepair.
  • The process can be unpredictable, stressful, and sudden changes can occur quickly.
  • A sizable down payment is usually required to show the lender that you are a better risk than the last homeowner.
  • Some lenders are more resistant to short sales than others.
  • Short sales become exponentially more complex if there is more than one lender involved. Often the second or third lenders are the ones taking the largest financial hit, causing them to dig their heels in and resist, which can cause extreme delays in the process.

As long as you enter into the process with your eyes wide open to the potential pitfalls and have a qualified real estate attorney working for you, a short sale purchase may very well be one of the best decisions you’ve ever made.