Long before a home is foreclosed on, the homeowner has been struggling to make payments. (It will typically be 7-8 months from the first missed payment to eviction.) In a better market, this owner would often list their home and try to sell it before the foreclosure became a reality, but in today’s market, this situation is often impractical because they can’t sell for enough to pay off their mortgage(s).
This scenario has led to a massive increase in short sales. A short sale is simply a sale in which the lien holders (i.e. mortgage company) agree to settle for less than is owed; this allows the transaction to take place in a situation where it would otherwise be impossible. This benefits the homeowner by avoiding foreclosure, and almost certainly reduces the lender’s losses by tens of thousands of dollars when compared to a foreclosure.
Because of these advantages, short sales have become rather ubiquitous in the past year. Given their prevalence, here are some things you should know in regard to purchasing a short sale:
Who Qualifies for a Short Sale: While a lender could theoretically agree to a short sale for any home, it is generally required that the the seller have some form of “hardship” which has resulted in their inability to pay. (There are dozens of “hardships” generally accepted by lenders) Anyone can purchase a short sale.
Typical Terms: The property itself will be “as-is” in most cases since the seller typically has very little cash for repairs. Other terms, such as closing costs are generally negotiable but the lender holds the trump card since they approve each sale individually. The lender can effectively dictate just about anything related to the transaction, and while most lenders are becoming more cooperative, how stubborn and meddlesome the lender is varies greatly from one lender to the next. Also, because the seller’s lender needs time to approve the transaction most short sales take significantly longer than a traditional sale.
Value: In the present market short sales are selling for prices similar to bank owned property in most cases, but tend to be in better condition. This makes them some of the best deals readily available, but they do carry some additional risk if you don’t understand the process (mostly in the form of lost time and frustration if the deal falls apart).
Opportunity: Excellent opportunities for a flexible buyer who doesn’t have to move by a specific date. Short sales have gotten a bad rap due to the sluggish lender response times, but things are improving with the vast majority of lenders and short sales are a viable option for many buyers.
[jeremy]
