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Buying a Short Sale

Buying a Short Sale
5 min. read

If you’re on the hunt for your new home, you may have come across a number of properties listed as short sales. Often displaying a lower price tag than similar properties, they can certainly be tempting. However, you may be suspicious—is it too good to be true?

It’s only natural to fear what you don’t know—but on the flipside, knowledge is power. Read on to discover everything you need to know about buying a short sale, from what a short sale is, to the pros and cons. With an understanding of short sales and how they work, you can make an offer with confidence.

And, you never know, it might just be the key you need to open the door to your dream home!

What Is a Short Sale?

A short sale refers to any sale in which the seller is forced to sell their property for less than the amount owed on their mortgage. As an example, imagine you took out a mortgage of $500,000 and still owe $450,000. If you were only able to sell your home for $400,000 your property would be listed as a short sale.

Provided a short sale property sells, the total earnings will be less than the remaining mortgage owed. This means the seller—and more precisely their lender—is losing money. Such a sale requires the lender to accept this loss and forgive the debt owed. As you can imagine, this isn’t always an easy sell and it can take banks and lenders some time to agree to such conditions.

How Do Short Sales Occur?

There are several reasons for a short sale to occur, though a common feature tends to be that the seller is eager to sell for one reason or another. It could be that the seller has to relocate unexpectedly, or that they’re unable to keep up with mortgage repayments. It can also be a last-resort attempt to avoid foreclosure and bad credit.

What’s in it for Lenders?

Now you know what a short sale is and how it can occur, you’re probably asking why a lender would ever agree to it! There are, however, certain benefits for banks and lenders when contemplating a short sale. When a property goes into foreclosure and the lender has to take possession of it, there are a lot of tedious procedures that must be followed and additional costs.

It can be difficult for the lender to sell the property once it goes into foreclosure. They must also consider additional costs of evaluations and real estate agent fees. If, on the other hand, they can sell the property and be done with it via a short sale, it may be the more favorable option, even if they do stand to make a loss.

The owner also gains from a short sale. Obviously, they won’t walk away with any money, but they would have avoided foreclosure. Going into foreclosure has a huge negative impact on your credit score, while a short sale ensures you sell your house and get out of a potentially difficult situation.

But what about buying a short sale?

The Advantages of Buying a Short Sale

It seems that in some strange way, everybody stands to win from a short sale as there are indeed advantages for the buyer as well. Typically, the price of a short sale property is lower than similar properties on the market and buyers may be able to find a good property for a fair market price.

This is because both the seller and their lender are keen to sell the property and avoid foreclosure while recouping some of their losses. This is a huge benefit to the buyer, but it’s not all plain sailing…

The Disadvantages of Buying a Short Sale

While buyers stand to grab a bargain home, short sales generally take longer to complete than typical sales, often lasting several months. In this time, other buyers are likely to put their offers in, potentially driving the price up and resulting in you missing out on what seemed like a sure thing. But other buyers are not the only thing to think about.

As mentioned previously, lenders can find losing out on their investment a hard pill to swallow. Often, the entire short sale process hangs on a thread held by the lender. More often than not, they will refuse an offer that falls short, even if the listing price has been met. Bear in mind that many short sales are listed at tremendously low prices that lenders will often refuse.

This can all be discouraging for potential buyers as they find their actions determined somewhat by the wishes of the previous lender. Another potential issue buyers of short sales might have is that such properties are often bought ‘as is.’ However, unlike with a foreclosure property, buyers are able to view the property and have it inspected and can walk away if they don’t like what they find.

In short—no pun intended!—short sales can be a risky endeavor. While you may find a real bargain, the delicate process is likely to take several months to complete, and your offer could be rejected at any time. On top of that, during the long process, other potential buyers may make a better offer than yours, leaving you out of luck.

However, with patience and an understanding of the process, you might just pick up a real bargain—many potential buyers withdraw their offers on a short sale as it takes too long to complete. If you can hold out, it might just pay off!

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