The skinny on how a short sale works for the buyer.
what is a short sale?
A short sale happens when a homeowner wants to sell their home but owes more on their mortgage than the home is worth. Usually, they opt for a short sale because they’ve fallen into financial hardship. In order to sell, they have to demonstrate their financial situation to the lender and show that they cannot pay off the rest of their mortgage, whether that’s in monthly payments or in a lump sum.
Before a homeowner can put their home up for short sale, their lender has to approve. Since they’re receiving less than the amount the borrower owes, it’s up to the lender to count the cost and determine whether it’s worth it to move forward with the deal. This is why it’s called a short sale, because the mortgage lender is agreeing to a “short” payoff.
If the lender approves, the home will be sold “as is,” meaning the lender will not fix any defects that would potentially cost the buyer substantial amounts. In addition, the lender oftentimes will not report the amount of short sale as a charge-off as they would with a foreclosure. This is a better situation for both the seller and the lender because foreclosure has more of a negative impact on the seller’s credit history and it involves processing fees that can be more expensive for the lender.
Sounds beneficial to the seller and the lender, but what’s in it for the buyer?
Before a homeowner can put their home up for short sale, their lender has to approve.
the pros of buying a short sale
Short sales and foreclosures are sometimes grouped together. That’s because both are usually done at the same time, and it’s in the process of foreclosure that the lender may allow the homeowner to short sale. But despite their similarities, there are some differences between short sales and foreclosures. For one thing, with a short sale, the seller tends to continue living in their home while it’s on the market. But with a foreclosed home, the occupant has to move out, leaving the home vacant and vulnerable to break-ins, vandalism, and neglected maintenance. Thus, buying a short sale is typically not as risky as buying a foreclosed home.
Another pro to buying a short sale is that, as the buyer, you may not have to deal with much competition. Since short sales can take some time to close, most home buyers aren’t willing to wait around long enough for the deal to be finalized. That said, if you want a speedy closing, buying a short sale is probably not the way to go (more on this later).
Finally—and probably the most enticing aspect of buying a short sale—the home will most likely come with a low purchase price. Since both the seller and the lender are motivated to sell the home as quickly as possible, they’ll probably list it for a low price so it sells fast.
the cons of buying a short sale
Like we said, if you want a speedy closing, buying a short sale is probably not the way you want to go. A short sale takes longer (we’re talking months) because of all the paperwork involved and the need for the lender’s approval. So if you’re set on a specific closing date or you have some sort of time constraint, you might not want to buy a short sale.
That’s not the only downside. Since the lender is already trying to mitigate their losses, they’re less likely to pay for any extra costs, which could make it more expensive for you at closing. And don’t expect the seller to cover any costs for repairs or give a seller credit at closing because their financial situation initiated the short sale in the first place.
Speaking of repairs, that’s another con for you to consider. Although you might be getting a good deal on the purchase price, be prepared because you may have to spend a lot of money on fixing up the home. That’s because the seller most likely doesn’t have the financial ability to make repairs or the motivation to do so.
There are good and bad points to buying a short sale, but when it comes down to process, how does a short sale work for the buyer?
Buying a short sale is typically not as risky as buying a foreclosed home.
how does a short sale work for the buyer?
Here’s how it works. First, you’ll want a real estate agent on your side who has experience with short sales. They’ll be able to research the listing before you even start the process and give you their honest opinion on whether this is a good deal. If you decide to move forward, they’ll also be able to communicate with you and the lender to find out exactly where the home is in the process. Since short sales usually take longer to close, you’re going to want an agent who knows what’s going on every step of the process and can communicate expectations with you.
Next, make sure you get a really good home inspector. Like we mentioned, one of the cons to buying a short sale is that there might be a lot of costly repairs you’ll need to make. A top-notch home inspector will be key in this process. And just in case the inspection reveals significant damage you can’t afford to fix, you may want to take preventative measures: partner with your agent to ensure your contract has the right language to give you to ability to back out of the deal.
Lastly, buckle in for a long ride. We can’t say it enough. This isn’t likely to be your quick-and-easy 28-day closing. But if the pros outweigh the cons for you, buying a short sale could be a great investment at a low price tag.
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