Purchasing a home at an extremely discounted price may seem like a pipe dream for most home buyers, but deals like this can be available in the form of a short sale. Although complex and risky, short sales can offer home buyers a house at a more than desirable price.
What is a short sale?
Essentially, a short sale is when a home is sold for a price that is less than what the current home owner owes.
Once a homeowner recognizes that they can no longer afford their mortgage, they can begin the short sale process. This involves contacting their lender to apply for a short sale with the hopes of avoiding foreclosure.
If the lender determines that the home is worth less than what is owed, they might approve the home for a short sale.
A lender is not required to go through with a short sale just because the owner wants to.
The Difference Between a Short Sale and a Foreclosure
It’s important to note that a short sale is not the same as a foreclosure. A foreclosure involves the property being repossessed by the bank before being sold at a discounted price.
Although in both scenarios the owner winds up losing the property, a short sale involves the owner willingly entering the process, where a foreclosure is involuntary.
The primary draw to a short sale over a foreclosure is that a short sale is far less damaging to the owner’s credit score and their credit history. It’s common for a home owner going through a foreclosure to declare bankruptcy.
Why do a Short Sale?
As a buyer, short sales are attractive because the price of the home is usually significantly cheaper than it would be for a traditional transaction.
As a seller, going through a foreclosure can make it difficult to obtain a new mortgage in the future compared to a short sale. A foreclosure will typically require the owner wait seven years before acquiring a new mortgage, while a short sale will usually only require two. And as stated before, a short sale will have far less negative impact on one’s credit history than a foreclosure will.
What are the Cons of a Short Sale?
A major drawback to short sales as a buyer is that these homes are sold “as is.” This means whatever condition the home is in, is how it will be sold to the buyer. Because the owners have been experiencing financial difficulties, these homes may not be in the best condition.
Additionally, short sales are known to take much more time than traditional home sales. It’s extremely rare for a short sale transaction to be completed in under a month. It’s very common for buyers to make an offer and then cancel when the bank takes a long time to accept.
Sellers do not have any negotiating power when it comes to the price of the house. All the negotiating is done through the lender. And all proceeds will be given to the lender, meaning the seller will not make any profit off the sale. Short sales will hurt the seller’s credit score.
Tips for Short Sales
As long as the risks are understood, purchasing a home through a short sale can be a great option for many buyers. Remember that the lender is in charge though. Even if the seller accepts an offer, it must be approved by the lender.
You’ll need to get an inspection to determine what repairs will need to be made. If you can prove to the lender that a significant amount of repairs are needed, then you may be able to negotiate a lower price. Don’t offer too low though, your offer can still be denied. A lender will want to ensure that they are recovering as much of their losses as possible.
It’s also a good idea to pay with as much cash as possible so the lender can reduce their risk. The less risk a lender has to take on, the more attractive an offer will be to them.
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