Foreclosures used to be every buyer’s nightmare—until short sales came along. A short sale occurs when the amount of the homeowner’s mortgage is higher than the home’s market value. So, if you bought your home with a mortgage of $200,000, and today the market value of that home is only $125,000, you are short $75,000. Given future market predictions, it would likely take decades for your home to appreciate enough to make up that shortage.
Sellers who are underwater on their mortgages will try to stop the money hemorrhage through a foreclosure, deed-in-lieu of foreclosure, or short sale, resulting in an abundance of low-priced homes on the market. Sellers often prefer to sell short, rather than foreclose, and in today’s market a seller’s loss can be a buyer’s gain.
So, how do you buy a short sale?
In a short sale there are several negotiating steps. First, the buyer and seller negotiate the price and terms. Second, the seller tries to get his lender (or lenders if there is more than one mortgage) to accept those terms. Since the sale price will be well under the mortgage amount, the seller has to get the bank to accept the “short” amount as full payment for the actual amount of the mortgage. The seller also has to be sure to get a signed agreement from the bank that it will not pursue a deficiency judgment after the sale.
This wouldn’t be real estate if there weren’t hoops to jump through. The down side of buying a short sale property is that it takes time—lots of time. While a normal closing, even if it’s a foreclosure, may take one to three months, a short sale can take up to six months, or more. There’s a lot of negotiating to do; it’s usually done by lawyers or short sale experts, and these people do not rush. So understand that, once your offer is accepted by the seller, the process is only beginning.
And here is why short sales are not for the faint of heart. During the waiting period, the bank may at any time counter or reject the terms to which you and the seller have already agreed. The bank may increase the purchase price, eliminate the seller-paid closing costs, or do just about anything it wants. You, of course, always have the option of canceling the transaction, but many buyers feel that the new terms are still worthwhile. Besides, if you want the sale to be contingent on an inspection, you will likely have to complete it before the offer goes to the bank, so you will have already invested several hundred dollars in the house before you get a response from the bank.
Overall, short sales are like everything else in real estate—they involve risk, but if handled prudently, can bring reward. With an experienced Realtor guide and a lot of patience, you could very well find a great short-sale bargain.
Janet Contursi has been a Twin Cities Realtor® for more than 10 years. She is expert in all types of residential real estate, including short sales and foreclosures, and she especially enjoys working with first-time buyers and sellers. Contact her at (612-655-1207) or: firstname.lastname@example.org
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