Thinking Of Buying a Home in a Short Sale? Here’s All You Need To Know
Understanding A Short Sale On Property
A short sale often referred to as pre-foreclosure sale, is one in which the lender (for example a bank) agrees to allow the owner of the property to sell his/her property short of the amount due on the property. Hence the term ‘short sale’.
For example, the owner of the property may sell his /her home for $180,000 despite having an outstanding mortgage of about $230,000. In such cases, the lender allows a sale and accept a lower amount to close the debt.
Short sales are thus resorted to as the final option during illiquid situations or hard economic times. For example, during the Great Recession period, the US Treasury department facilitated easier norms for short sales, thereby avoiding the number of foreclosures.
So, buying a short sale property might sound lucrative to many. However, there are certain disadvantages to it as well. Let’s look at some of the pros and cons of opting to buy a home in a short sale.
Benefits of Short Sale
There are plenty of upsides to buying a home in a short sale, however, the two major ones are listed below.
1. Reduced Price
A major benefit in a short sale is the higher odds that one can purchase the property at a much lower price as the owners, as well as lenders, may be keen to sell the property and come out of the long overdue loans.
2. Lesser Competition
In a short sale, there may be fewer competitors for buying the property on account of the complications involved.
Many people who are first time home buyers may be skeptical about purchasing a short sale property and may not like to get involved in the complications. This narrows down the possible buyer category as only buyers with experience and patience may opt for short sale property. This makes the buyer face less competition in purchasing a home.
Shortcomings of a Short Sale
Despite benefits, there are some undesirable repercussions that buyers could face when buying in a short sale.
A short sale in addition to being complicated may have many mortgages on the same property. Hence the process can take considerable up to six months or more to close the purchase on short sale.
One has to seek approval from many lenders and negotiate liens from additional entities.
The deal may not be accomplished even if one lender refuses to move with short sale option.
When Does Short Sale Happen?
Short sales happen in markets that have not fared well, in rural or non-metro areas for instance or in areas where there is no development and property values remain stagnant, and the population is plummeting.
Things To Know When Buying In A Short Sale
1. More extended Time Period
The difference between a short sale and a traditional transaction is the time involved to obtain third-party sanction from various lenders.
The buyer after having made an offer in a short sale has to wait for the primary lien holder to initiate or negotiator after having verified the seller’s difficulty and get notified of all other lien holders on the property. All these lien holders will then assign their negotiators to discuss the deal and payment method.
2. Many Approval Levels
The short sale requires numerous approvals from various lenders, first lien as well as secondary lien holders, etc. and making all of them agree requires cutting across multiple levels. A lot of negotiation is required to make payment and obtain the property debt free.
3. Interference From Lenders
As the lenders may become directly involved in the deal negotiations as described above, they may pressurize the buyer to pay more sales price than the deal amount prescribed by the seller in order to recover more money on the home loan. They may also insist that the buyer pay all closure fees etc.
4. As is Where is Condition
The property to be bought in a short sale is likely to have been in debt for a considerable period of time and is likely that there is some deferred maintenance. A lot of due diligence on the property is to be carried out for which the lenders may not be willing to pay. The buyer may have to hire a home inspection professional to check the status of the house, and all these payments will have to be borne by the buyer.
5. Seek Experienced Professionals
As short sales are complicated especially from seller’s side, it is better to have real estate agents who are well versed in this. Hence one must ensure that the listing agent has a right amount of experience in this area before embarking on a short sale through the agent. If the agent lacks experience, then there is a high chance that the deal will never get done.
6. Last Minute Hiccups
A short sale purchase is prone to the chance factor as there may be last minute complications when one lender does not approve to the deal and hence there is a possibility of the deal getting canceled at the last minute after all efforts are undertaken. This can be frustrating to the buyer, as he has to start all over again especially after having waited for months to close the deal.
7. Sufficient Cash
Even though the buyer is not making an all-cash payment, he must have sufficient cash to make a substantial down payment and also make an enticing offer that the lien holders can’t refuse. Further, there may be an outstanding amount due in the form of association fees, unpaid repairs, and improvements bills, etc. and hence it is necessary to have sufficient cash to negotiate these. Further deferred maintenance may require additional cash spending and the buyer may be at a disadvantage if numerous repairs are required for the property.
8. Short Sales are Difficult to Locate When the Market is Up
If the market is good and there is intense buyer interest to buy houses in a particular locality, and the houses put for sale are immediate hot takeaways then the owner may not intend to go for a short sale instead it may be sold as a regular traditional sale.