Posted 08/19/2016

Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.

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What To Know About Buying A Short Sale

Short Sales - The Extra Effort Could Pay Off

Gina Pogol

The Mortgage Reports Contributor

What Is A Short Sale?

A "short sale" is a home that sells for less than the amount owed on the property. Lenders allow short sales to avoid foreclosure proceedings, which can be more expensive.

Short sale homes, however, are not necessarily priced below market value, and not all short sales are bargains.

Plus, these transactions can take months to complete. You may miss out on other homes while waiting for the bank to accept your offer.

Still, the right home can provide instant equity and solid value to the new buyer.

Weigh the advantages with the drawbacks, and make sure your discount is steep enough to justify the extra work that comes with a short sale home purchase.

Verify your new rate (Nov 23rd, 2017)

Your Due Diligence Before Buying

Before submitting an offer on a short sale property, it’s smart to get a BPO, or Broker Price Opinion, to make sure you’re getting a good deal. Base your offer on the property value, not the mortgage owed -- that’s irrelevant to you.

While not always offered at discount, short sale homes are usually priced below market value. According to the National Association of REALTORS®, the average discount for a short sale property is 11 percent.

Without a discount, few buyers would be willing to take on the extra effort associated with a short sale purchase.

Verify your new rate (Nov 23rd, 2017)

Are Short Sales Difficult To Complete?

Short sales are different from ordinary transactions. The existing loan holder -- the current lender on the property -- must approve the sale price and terms.

Before they do, though, there needs to be a legitimate offer on the table.

So the existing owner can list the house for sale, and get an offer, without having any idea what the bank will accept. Only after the owner receives the offer does it submit that offer to the lender.

The lender could flat-out say no. That's disappointing for the seller, but even more so for the buyer.

The maxim among real estate professionals is that short sales are anything but short. That's due to the above reasons, plus the fact that lenders may sit on offers, refusing to decide until there are several to consider.

This adds a lot of time and uncertainty for potential buyers. Short sales typically take three to six months to complete, and the failure rate is about 75 percent.

Good deal? Maybe. Streamlined process? No way.

Beware Of Unexpected Costs

In the typical sale, sellers often contribute toward the buyer's mortgage closing costs.

This entices the buyer to purchase the home, instead of someone else's.

But short sale buyers don’t often get the same seller concessions that traditional buyers do. Banks are not interested in helping the buyer, and may even add fees to recoup more of their losses.

The "short sale administration fee" or "short sale processing fee" are common extra costs the existing lender likes to tack on. They typically equal one percent of the sale price.

Buyers may also be asked to pay delinquent taxes or HOA dues when they buy a short sale home.

Ask for an estimated closing disclosure from escrow. This is the document that details all the fees associated with the transaction. Go through it line-by-line.

Ensure the deal is still "good" after additional fees.

Verify your new rate (Nov 23rd, 2017)

Look For “Approved” Short Sales

As mentioned earlier, just because you see a short sale listed doesn't mean the lender will accept the advertised sale price.

An “approved short sale” listing, though, is different. This means the lender has indicated it will consider short sale offers, and has set an acceptable price.

If you submit an offer at that price, the bank will accept it and you can close faster -- at least in theory.

Approved short sale listings come about when a potential buyer submits an offer for consideration but backs out after the bank approves it. At that point, all parties know the bank will most likely accept a similar offer.

Still, don't be afraid to offer a lower price for consideration.

Verify your new rate (Nov 23rd, 2017)

How To Get Mortgage-Approved To Buy A Short Sale

You don’t have to do anything special to finance a short sale property.

As far as your lender is concerned, it's no different than a regular home purchase.

Make sure you are pre-approved for a home loan. The mortgage-holding bank will likely reject any offer not accompanied by a pre-approval letter.

Also, ensure the property meets the lender’s requirements. The property must meet minimum standards for your chosen loan program. Ask the seller's agent to disclose any property deficiencies, such as a leaky roof, peeling paint, or missing exterior stairs or handrails.

Popular loan programs are as follows, and each comes with its own property standards.

Each loan program, in general, requires similar standards: the property must be a livable and safe structure for the new owner.

Keep your pre-approval updated. Short sales take time, so you may have to renew your loan approval with new documentation every 30 to 60 days. Hold onto all pay stubs and bank statements during the process.

Wait to order an appraisal until you receive final short sale approval. Appraisals expire after 90 to 120 days. At a price tag of $500 each, you don't want to order more than one.

A longer closing time frame could affect your interest rate locking strategy, too. You can lock your interest rate for three-to-six months, but that usually costs upwards of one point (one percent of the loan amount) upfront.

It’s cheaper to lock for a shorter term when you are close to your closing date. But your rate is subject to up-and-down mortgage rate movements.

Short sales, if you don’t mind the challenges and are ready for the extra time and costs, can be a good way to add instant equity to your home. It’s hard to make a bad investment when you do your due diligence and combine a lower home price with today’s bargain interest rates.

What Are Today's Mortgage Rates?

Interest rates are near all-time lows, and it's a fantastic time to become mortgage-approved for your first -- or tenth -- home.

Get a rate quote now. No social security number is required to start, and all quotes come with a home buying eligibility check.

Verify your new rate (Nov 23rd, 2017)

Gina Pogol

The Mortgage Reports Contributor

Gina Pogol writes about personal finance, credit, mortgages and real estate. She loves helping consumers understand complex and intimidating topics. She can be reached on Twitter at @GinaPogol.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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