How to buy a short sale home

Pete Gerardo
The Mortgage Reports contributor

In this article:

There’s only one reason to buy a short sale home — to get a great deal.

  • “Short sale” simply means the sales price is less than the balance of mortgage(s) owed against it
  • Short sales can take longer to close because lenders are not in the business of selling houses
  • The short sale discount should be substantial, or it’s probably not worth the hassle

Short sales can take longer because the lender, not the owner, has the final say about what price will be accepted.

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Short sale home transactions

Short sale transactions, where lenders allow homeowners to sell their houses for less than they owe, are more complex, time-consuming and risky than regular home sales. How long does it take to close on a house? That depends.

And good deals aren’t as plentiful as they once were.

Related: How to buy a home after a short sale

In February 2010, short sales accounted for 17% of all residential real estate sales. In 2016, by contrast, they comprised 5.5 percent of home sales – the lowest level since 2008.

Bargains are available. But you’ll need to work harder and smarter to find them.

Benefits of short sale home purchases

Unlike foreclosures, which are owned by a bank, short sale homes are still owned (and usually occupied) by the homeowners.

For this reason, short sale homes tend to be in better condition than foreclosures. Owners are less likely to neglect or trash them.

Also, an occupied home isn’t as ripe a target for vandals as a vacant one.

Related: 10 percent off: Consider short sale homes

Most homeowners pursue a short sale when they can no longer pay the mortgage, and they owe more to the lender than home’s current value.

If the lender (or lenders) believe they can recoup more money from a short sale than a foreclosure, they will often agree to the transaction.

To ensure that the homes don’t languish on the market, some banks list them at low prices.

Because short sales rarely close in under 30 days, you’ll probably face less competition than you would with a regular home sale. Most buyers don’t want to wait months to close.

How to find short sale homes

Given the complexity and risk associated with short sales, this is no country for newbies.

Although you could search for properties on your own using a Multiple Listing Service (MLS), it’s better to hire a real estate agent experienced in short sales.

A good agent will check the title, learn whether a foreclosure notice has been filed, and determine how much is owed to the lender(s). This data will help you prepare a competitive offer.

Related: How to complete a short sale deal

In addition, the agent will help you negotiate the best deal and overcome any roadblocks to a successful close.

Here are three common obstacles:

  1. If the homeowner borrowed from multiple lenders, the “junior” lien holders might block the sale. These lenders often receive little (or no) money from short sales.
  1. The seller could cancel the deal. This sometimes happens when the primary lender asks the seller to contribute to the closing costs and the seller balks.
  1. The banks accept a competing offer. This can happen even after you make an earnest money deposit and pay for a title search, home inspection, etc.

Making an offer

Unless you’re paying with cash, your first step is to get pre-approved for a mortgage.

This is a must. Without financing in place, a bank is likely to dismiss your offer out of hand.

Your second step is preparing a competitive offer.

Related: 5 steps to take before making an offer

If you’re thinking of launching the negotiations with a low-ball offer, think again.

This tactic might have worked during the last recession when lenders were desperate to mitigate their losses. These days, says Freddie Mac, many banks are so overwhelmed with short sale requests and multiple offers that they won’t even counter-offer if you submit a low-ball bid.

Underpricing is the #1 reason that banks reject short sale offers.

Another common reason for rejecting an offer is an incomplete offer – one that doesn’t contain all the necessary documents.

A good offer package will include:

  • A purchase contract for you and the seller to sign.
  • An earnest money deposit. A substantial deposit shows the bank that you are a serious buyer. (If the deal closes, the deposit becomes part of your down payment.)
  • A pre-approval letter to prove that you have the ability to purchase the property at the proposed price.
  • Information on recent sale prices for similar properties in the area – “comps” – to prove that your proposed price is reality-based.
  • Proof of funds. This may be needed if a pre-approval letter doesn’t convince the seller that you have enough money. Proof of funds can include copies of bank and money market account statements, as well as equity lines of credit and certified financial statements.

Homes are sold “as is”

You and your agent should also prepare a short sale addendum with certain contingencies.

For example, you probably want your offer to be contingent on the results of a home inspection, the lenders’ approval of the sale, the length of time you’re willing to wait for short sale approval, and the amount you will pay in closing costs.

Whatever you do, don’t buy a short sale home without having the place inspected first.

In fact, you may want to hire specialized inspectors to look for pricey problems such as termites, mold and structural damage.

Related: Should you bail after a really bad home inspection?

Keep in mind that short sales are “as is” purchases.

Unlike regular home sales, you should not expect the seller to lower the asking price if any problems are uncovered. It rarely happens.

If you’re a smart and determined buyer, it’s possible to find short sale bargains. Once you find one, a successful outcome can definitely be worth the effort.

Just don’t expect the process to be fast, easy or migraine-free.

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