Is a Short Sale Right for Me?
If you need a house fast, negotiating for a short sale is not the way to get it. Completing such a sale can be an difficult process, and everyone involved may be hung up for months as the deal works its way toward closing. In the end, the sale may fall through with the bank or mortgage company.
That said, the buyer who has the time and patience to make an offer on a short sale can end up with a good value and get a great house at a fair price. Note that the word here is “fair.” Anyone hoping to hit the housing jackpot through a short sale is at risk of being disappointed. A lender is, after all, in the business of money, and the bank may balk at a sale price wildly lower than the prices paid for other comparable houses in the area.
Short sales were common in the wake of the housing downturn and even as the market started to show signs of recovery. Most recently, the percentage of homes up for short sale has reportedly declined from around 10 percent of homes for sale to less than 5 percent. Experts theorize that uncertainty regarding the tax laws related to short sales has made homeowners more reluctant to try the tactic. But short sales are still available.
What exactly is a short sale and can a buyer benefit from a short sale? A short sale is a transaction in which a home is sold for less than the amount owed on its mortgage. The mortgage-holding bank must agree to the sale, effectively “forgiving” part of the debt owed. A homeowner requesting a short sale must show hardship, such as illness or the loss of income, to gain approval.
Today nearly a fifth of homeowners are still “underwater” following the housing bust and recession. Having purchased property at or near the height of its fair market value, these homeowners hold properties that are simply worth less in today’s market than when they were purchased.
If a homeowner needs to get out of a house in this circumstance, options include:
- Selling short with the mortgage holder’s approval and its forgiveness of the leftover debt.
- Selling at current market value and bringing his or her own money to the table to make up the difference between the buyer’s purchase price and the amount owed on the existing mortgage.
- Defaulting on the loan and allowing the house to enter foreclosure, which leave a black mark the borrower’s credit record and the borrower may incur other financial impacts. (Not all homeowners realize it, but a short sale will also damage credit.)
When a homeowner cites a hardship and requests short sale approval, the bank looks at the numbers. Will it do better to pursue foreclosure, which has its own costs, or sell the property at less than its current mortgage balance?
And that’s where you, as a buyer, come in. Your questions might be: Can the place be bought at the low end of current market value? Is buying a short sale a good deal?
Do your homework before making an offer. Learn about the true condition of the property. Are there any major repairs or upgrades needed or outstanding liens in addition to the first mortgage? In a short sale, the lender is unlikely to pay for inspections or repairs, offering the house “as is.” Factor in any serious deficiencies into a purchase offer. The bank also should be made aware of any physical or title issues with the property and is expected to treat your analysis with respect and consideration. When it comes down to a number, gain an edge with a fair and reasonable offer that’s also a good value for you.
Real estate agents handle short sales, and some specialize in guiding buyers and sellers through the process. To find a local real estate expert, check our list of agents. Or take a look at homes for sale in our real estate listings.