Short Sale - What Buyers Should Know

November 20th, 2007 categories: Home Buyers, Investors/Landlords

In my last post, I gave homeowners a quick explanation of short sales. This time, my post is for potential short sale buyers.

What’s a short sale?

A lender agrees to accept a sale of a property for less than the mortgage owed plus the expenses for having a short sale (realtor, appraisal & attorney fees, e.g.). The homeowner owns the property and is selling it, but before the sale can occur, the bank needs to approve.

How do I know it’s a short sale?

If you’re looking at properties that have descriptions such as “subject to bank approval,” “subject to lien-holder approval,” or “as is,” these may be short sales. Some listings will say, “short sale,” but not all.

How is a short sale different?

In a traditional real estate transaction, there are two parties - the buyer and seller. With a short sale, add one more -the bank. Like any other real estate purchase, a buyer sees a property they like and submits an offer to the seller. If the seller likes the offer, they accept it, contingent upon the approval by the bank.

The buyer can still perform an inspection, but since the sale is “as is,” neither the seller nor the bank are likely to make any repairs. In addition, most lenders will not permit closing cost credits for repairs.

The buyer still pays for their own appraisal via their bank but the seller’s lender also has an appraisal done and it is this appraisal that matters. The bank will base its decision to accept or reject the short sale based on their appraisal - and they have been known to reject offers that are lower than the appraisal. They may even come back to the buyer and ask for the buyer to increase their offer before approving the short sale.

The time to close in a short sale is also different. A bank can take anywhere from 4-6 weeks (possibly longer) to approve the sale and once they approve, they generally want to close ASAP. So, before the sale is even approved, the buyer will have already had an inspection and had their appraisal done.

What are the risks for buyers?

As with any property owned by someone who is having trouble making payments, there is the issue of deferred maintenance. If homeowners are letting their mortgage payments slide, what about their leaky roof, old furnace or overgrown landscaping. Since short sales are sold as-is, a buyer can pay for an inspection but it’s really for information only - not to get repairs made or repair credits at closing.

Another risk is that the buyer pays for the inspection and the bank does not approve the sale, or asks the buyer to come up in their offer. If the bank says no, the buyer is then out the inspection costs and any other fees their bank is charging them.

There is also an issue with some companies that do foreclosure rescue. These companies approach homeowners in distress and contracts to take title in a trust in exchange for negotiating a discounted payoff with the lender. Meanwhile, the company lists the home for sale to secure a third buyer. The issue with this scenario is that the lender only approved the sale to the rescue company, not the third buyer. And since the lender has not yet issued a release of mortgage and is still the lien-holder, they must approve the sale to the third buyer.

Are short sales a better deal?

Maybe, maybe not. Here are two comparisons, where one is a better deal, at least on paper.

Short Sale A Better Deal: Condos at Ellington Ridge

1 Abbott Road, #184 sold for $120,000

3 Comparable Units Sold for $135,000, $139,200 and $139,500 with no seller concessions.

Short Sale Not A Better Deal: Condos at Cromwell Hills

10 Bayberry sold in October for $155,500 - no seller concession

3 Comparable Units Sold for $159,500, $160,900* and $156,900*. *Sold with the seller giving a concession of $5,000 to buyer.