A short sale offers a way for a seller and a mortgage lender to avoid foreclosing on a home. Essentially, the lender agrees to accept less than the full outstanding mortgage price of the house, usually because the seller can't pay or owes more on the home than it's worth. The lender would rather recoup some of its money through a short sale to another buyer than undergoing the expense of repossessing the home in foreclosure.
Before the seller can list a house at less than the amount required to pay off the mortgage, the seller must obtain the lender’s permission. If the property is approved for short sale, the buyer will negotiate a price with the seller before taking that price to the lender.
However, the lender isn't required to accept any offer it believes is too low, even if the seller has accepted it.
What Buyers Should Consider Before Purchasing a Short Sale Home
The first thing to know about short sales is that buyers aren't getting a “discount” on the property. Lenders won't approve a short sale purchase if the lowered price is below market value for the home. Mortgage lenders will consider the comparative market analysis (CMA) carefully to know exactly what the property is worth, and won't hesitate to take the property to foreclosure if it believes it can get a higher price.
Before you tell your real estate agent to include short sale homes in your search, you should:
- Perform a public records search. If you want your purchase price offer to be accepted, the offer needs to be reasonable to the lender. A search of the public records reveals who holds title to the property (there may be more than one holder); how much is owed to the lender; and whether a foreclosure notice has been filed—all of which can help determine the amount of your offer.
- Do your due diligence. Just because buyers aren’t paying the price the seller paid doesn't mean the home is a bargain. There may be a variety of problems with the property, especially if it's sat vacant for some time. Unfortunately, short sales typically sell “as is,” so the lender may not be required to issue a disclosure statement outlining any known problems with the home. Buyers should extra careful during the home inspection process, especially when it comes to looking for roof defects, mold, or termite damage. If the property had renovations, make sure the necessary approvals and permits for the work are on file so the city doesn't take action against you when you're the new owner. If a problem is identified, get an accurate repair estimate—and be honest about your budget so you know when to walk away.
- See if there are multiple lenders. In some cases, the seller may have more than one loan securing the property. Instead of splitting your offer, mortgage lenders often require full payment of their own debt before the next mortgage can be considered. If your offer pays off the primary lender but leaves only a small amount for the second, the second lender may not agree to the transaction.
- Anticipate higher closing costs. While many buyers and sellers compromise on the costs they assume at closing, lenders usually refuse to pay any additional closing fees. This includes pest inspections, transfer taxes, repairs identified during home inspection, and other costs that buyers may have to pay out-of-pocket.
- Plan for closing delays. Everything in a short sale process must be approved by the lender, which can be a long and frustrating process. It takes several weeks or even months just to get a lender’s response on a purchase offer. If you're buying a home at the same time you're selling your current residence, it may be difficult to coordinate the dates, leaving you to assume the costs of temporary residence until you close escrow.
Use Our Expertise to Your Advantage
Remember, in a short sale, agents and lenders are the only ones who stand to make money from the transaction. A real estate attorney with experience in short sales can anticipate problems before the offer stage, working to secure a home that's within budget and aligns with your best interests.
If you have questions about your home purchase, fill out the short contact form on this page to set up a consultation.