You just heard about short sales, and they sound intriguing. The opportunity to buy a home at a discount doesn’t come up often. And because the sellers are still living in the home, it’s probably in better shape than a foreclosure.
But it would be a mistake to think you’re automatically getting a deal with a short sale. Rick Ruiz is an agent in Las Vegas, Nevada, who works with 70% more single-family homes than the average agent in his area. He points out that the bank isn’t likely to sell the property for less than market value. “The loss mitigation department is going to make sure that the bank is not leaving any money on the table since they’re already taking a loss.”
For buyers, it makes the most sense to consider a short sale if homes rarely become available in a neighborhood you’re dying to live in, if the home has features you haven’t found elsewhere, or if you’re an investor and the property makes sense for your portfolio — and you can wait to close in every scenario.
Short sales fall into the category of “distressed” sales. Buying one won’t be a walk in the park, even if the home is next door to one. Could they be a good fit for you? Here’s when it’s good to buy a short sale house.
First: What’s a short sale?
A short sale is when the owner of the house is underwater on their mortgage, and the lender agrees to let them sell the home for less than what’s owed.
For example, the home’s current market value could be $230,000 but the homeowners owe $265,000. They want to sell the house, but the sale won’t generate enough to pay off the mortgage.
This means they’re “short” the funds to clear the debt. The homeowners’ mortgage lender will have to agree to accept less than they’re owed.
When is it good to buy a short sale?
Trying to decide if you’re the right person, in the right situation, to buy a short sale? Ask yourself these questions and evaluate the pros and cons.
Do you have a lot of patience?
These sales can take a long time because the bank is involved. After a short sale seller receives an offer that they’d like to accept, they have to take it to the bank. The bank could send the offer through several layers of bureaucracy before either approving or rejecting the short sale.
Ruiz thinks that most traditional buyers don’t fit the short sale market well “because they don’t want to wait for months to get an answer. They want to get a counter-offer in 48 hours and not wait.”
Can you find a short sale?
It’s not easy to find a short sale, especially if you live in a hot seller’s market. They aren’t exactly thick on the ground.
Being underwater on a mortgage isn’t enough for many sellers to get bank approval to list as a short sale. Often, they must meet other requirements (such as documented financial hardship).
Do you have a place to live now?
These aren’t good deals if you’re in a hurry to move in quickly.
Lease ending on your apartment and don’t want to renew? See if you can go month to month, because a short sale could take several months to close. If you need a place to live soon, a short sale likely isn’t a good fit.
And the deals often fall through — even in 2009, at the height of the housing collapse, only 23% of short sale offers actually closed. If you’d be left without housing if the deal fell through, consider looking for a conventional home purchase.
Will the bank approve the seller’s financial hardship?
Being underwater on their mortgage is only one piece of the seller’s puzzle — to get approval for financial hardship, the seller often has to prove they can’t make mortgage payments.
The bank could request proof of loss of income, such as a layoff. They could examine the seller’s other assets, such as retirement accounts, to gauge their ability to keep paying.
In 2014, Gretchen K.’s home was valued at $80,000 under her $170,000 mortgage. She reached out to the lender and asked for approval for a short sale due to the difference in value.
“They denied the request after several months of back-and-forth communication,” she says. “When I kept inquiring, they stopped communicating completely.” They wouldn’t say why they denied the request. Eventually, even though she would have preferred to work with them on some kind of short sale solution, she walked away from the house.
Can you get the house inspected before writing an offer?
Short sales are typically sold “as is.” In a conventional home sale, you could request that the seller make repairs or reduce the sale price if the home inspection reveals serious issues. The bank likely won’t negotiate after approving a short sale price.
If you can get the house inspected before you write the offer, you can factor the home’s condition into the offer price. A home inspection also gives you a better idea of what you’re walking into — like needing a new roof before winter.
Ruiz doesn’t always think it’s a good idea to get an inspection before making an offer; he advises waiting until you know if you’re the winning bidder. If the bank won’t allow an inspection, and you’re not comfortable taking this risk, then walk away.
Can you and the seller agree on the purchase price?
If you and the seller can’t agree on a purchase price, or negotiations have stalled, then a short sale purchase might not be for you.
Even if you and the seller can agree on the price, the bank has to approve the sale price, too. Often, banks try to recoup as much of their initial investment in the property as possible. They may refuse to consider the home’s condition or market deterioration. Lenders try to get top dollar or market value for a short sale to minimize losses.
Can you pay the closing costs?
A bank won’t negotiate much other than the sale price.
In a traditional home sale, you could ask the seller to pay some of your closing costs, but the bank is unlikely to concede here. If your home budget depends on someone else covering closing costs, you may want to either wait and save more money, or factor that into your offer price on a short sale.
Do you have flexibility in your budget?
If you’ve got a tight budget, think hard about a short sale. Even after you’ve agreed upon a price with the seller, after several months of negotiations and paperwork and back-and-forth, the bank could decide it’s not happy with that price and ask for more.
Let’s say you’ve reached an agreement with the seller, but it’s taken the lender weeks to respond. The lender could perform another valuation, and if the property has gone up in value, the deal could fall through. In Ruiz’s opinion, “it’s very risky to the buyer.”
If you’re unable to meet that increased price, you’d have to walk away from the purchase. And don’t forget that short sales are as-is sales; you aren’t going to have a lot of wiggle room to make repairs, either.
Are you a qualified buyer?
Unless you can pay for the house in cash, you’ll need to get a mortgage. You’ll still need to be a qualified buyer.
This means you need: a qualifying credit score, a down payment or access to a zero-down loan, and money to pay for closing costs. It’s a good idea to get preapproved for a mortgage before home shopping in general, but definitely before making an offer.
Can you work with the bank and listing agent?
In Gretchen K.’s case, the bank wouldn’t even respond to letters or phone calls from the current owner. To surrender the property, she had to send a certified letter.
Banks aren’t usually in the business of buying and selling houses, and when they find themselves in the position of selling one, they can be notoriously challenging to work with.
When Ruiz is involved in a short sale, he’s asking who the lender is and whether the listing agent has delegated authority to act on the bank’s behalf.
“On the buyer’s side, you really have to engage heavily with the listing agent to hold them accountable,” he says, and “make sure they’re going through the process with the bank, that the sellers are providing updated financials, anything that needs to happen to move the sale forward.” Deals can fall through if an inexperienced listing agent handles the sale.
Do you love the house?
Ruiz’s best advice? If you’re going to buy a short sale, “make sure it’s that “gotta have it” house.
“You’re going to have to be prepared to go on the emotional rollercoaster of waiting three, four, or six months — and it’s not happening.”
In his area, turnover in some gated communities can be quite low. If a buyer has been trying to get into a community, and a short sale comes on the market there, it’s often worth their wait.
It’s not for the faint of heart, so you’d better have your whole heart in that house!
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