Short sale homes were common during the Great Recession but are less typical today. Still, short sale listings do come to market and differ from traditional home purchases in almost every way. Here's what first-time homebuyers and others need to know when buying a short sale home, or selling your home in a short sale.
What is a short sale when buying a house?
A "short sale" indicates that a property's sales price is less than the amount the current homeowner owes against it. A short sale does not necessarily guarantee a great deal for the homebuyer. Just because the mortgage lender may be taking a loss doesn't mean that the property is priced way below market value.
"People want to get houses for half price, and that's not going to happen," says Tina Uchytil, a Nevada-based REALTOR.
Typically, short sales do offer some discount from the market value of the property. If short sales didn't come with some discount, there would be no reason for buyers to deal with the challenges that these transactions can present. Make no mistake, short sales come with headaches: know what to expect.
What is the difference between a short sale and a foreclosure?
In a foreclosure, the bank takes ownership of the property that served as collateral for a loan in default. Short sales are different from foreclosure sales because the lender has not taken the property back, so the owner conducts the sale. The mortgage lender does not set the price; however, it does have to approve the terms because it will not be repaid in full from the proceeds of the sale.
Most banks will not agree to a short sale in writing until the seller undergoes a lengthy application process and there is at least one formal offer on the table. A property may be listed as a short sale even before the lender has actually agreed to accept a lower payoff.
Uchytil says that mortgage lenders can sit on buyer offers for weeks or months, hoping for a better offer before giving up on the process. "I have seen them foreclose on properties that had short sale offers on the table," she says.
Does a short sale benefit the buyer?
If you need to buy a house quickly, a short sale is not for you. A short sale can take months, and many prospective buyers never see it through.
Short sales do have one or two advantages over other types of financially-distressed properties. Since owners are motivated to sell in order to keep a foreclosure off their credit histories, the homes are generally kept in decent condition. No one is pouring cement down the toilets or kicking holes in the walls.
In addition, short sale properties are transferred free and clear of any liens. If you purchase a foreclosed property on the courthouse steps, you could inadvertently buy property with unknown liens and other title glitches. You won't have problems getting title companies to insure a short sale property, which is required to get a mortgage on the home. It's potentially harder to get title insurance and complete a purchase of a property once it has been foreclosed.
Candace Zansler of Reno, Nevada relates her typical experience purchasing a short sale property: "It was certainly worth the wait, but the waiting -- yikes! The hangup was with the banks. The seller had to get something like three loans forgiven, and we were the third accepted offer. I believe the others gave up after six months."
Uchytil agrees, "Most [buyers] get fed up and walk."
Is buying a short sale a good idea?
A barrier to a speedy short sale transaction is that buyers may be asked to pay unexpected fees. In some cases, the mortgage lender who holds the loan adds a fee payable by the buyer to try to recover some costs. This fee goes by names like "short sale administration fee" or "short sale processing fee" and may be about 1 percent of the sales price.
These fees are in line with Federal Housing Administration (FHA), Veterans Affairs (VA), and Fannie Mae and Freddie Mac guidelines, which also allow for buyer payments of delinquent taxes or delinquent homeowners association fees.
All these hurdles help explain why many short sales do not close.
While short sale homes aren't for everyone, they can work out to a buyer's advantage by obtaining a home at a lower price than would be necessary in a traditional sale. Remember these four tips to minimize headaches when buying a short sale home:
- Find a pro with short sale experience: Some multiple listing services (MLS) allow public access, and you can see if properties listed are short sale (also called pre-foreclosure) properties. You can browse these listings online on your own, but once you get serious, consult a reputable real estate agent with plenty of short sale experience. This professional can save you time and help you avoid costly rookie mistakes.
- Adjust expectations: Don't get your heart set on a specific property. Odds are you may not get it or it may take months to close once you have an accepted offer.
- Focus on single-lien properties and single-family properties: Every extra loan servicer in the mix adds another layer of complexity, so favor properties with only one lien over those with second mortgages. Avoid condominiums, at least if the owners are delinquent in their association dues (unless you don't mind paying to get them current).
- Find out the loan servicer'a authority: A "fully delegated" file gives the servicer the authority to make a decision on investors' behalf without sending them all the paperwork for review. On the other end, a "non-delegated" file confers no authority -- in which case the servicer must forward all documents for an investor to make the ultimate decision about approving a transaction. A "non-delegated" file adds time but it is, unfortunately, the most common arrangement.
Financing short sale homes
Financing a short sale purchase is not much different from financing a traditional home purchase. Sometimes, the property's lien holder may require that you get preapproved or prequalified for a mortgage with it before approving your offer. This is because it wants to be sure that you can complete the purchase.
Even if this is the case, you are under no obligation to use the same mortgage lender that is releasing the property, so you should of course shop for the best mortgage rates as you complete your escrow. Note that you might not be able to nail down current mortgage rates because the process takes so long that a rate lock may be useless.
Keith Gumbinger, vice president of HSH.com, says, "Yes, preapproval is a good idea, but given what is likely to be a plodding and trying negotiation period, it would seem that patience is not only a virtue, but rather a necessity. Expected timelines may need to be adjusted accordingly."
Can a homeowner make money on a short sale?
How does a short sale work for the seller? While a seller can not profit from a short sale, a successful short sale can avoid the credit damage associated with a foreclosure. Here are six tips to help sellers make their distressed property move faster:
- Incent buyers' agents: Realty commissions are negotiable, as are the commission splits that agents offer one another through a multiple-listing service (MLS). To make your house more attractive, offer a higher commission to entice buyer's agents, suggests Linnette Edwards, an associate broker at Better Homes and Gardens Real Estate in Piedmont, Calif.
- State your case: Many buyers are leery of distressed homes due to their poor condition, lack of disclosures from an owner-occupant seller and the "as-is" terms of sale. To signal that your home isn't subject to those drawbacks, ask your agent to describe it as "not an REO" or foreclosure in the MLS, Edwards suggests.
- Include appliances: Distressed homes are often stripped of appliances. That means a refrigerator, dishwasher, laundry machine and microwave can be a big plus, especially if your home is likely to appeal to first-time homebuyers who need to conserve their cash for a down payment and closing costs, Edwards adds. Ask your agent to promote the fact that appliances are included.
- Prep for sale: A home inspection and appraisal, obtained before you put your home up for sale, can help you make necessary repairs and price your home appropriately, suggests Paul Bell, a Realtor at Prudential Americana Group in Las Vegas.
- Let the buyers in: Rarely does anyone buy a house sight-unseen. To make your home more accessible to prospective purchasers, allow your agent to use a lockbox, which lets realtors get inside, Bell suggests. If your home is rented out, you'll need to get the tenant's cooperation, perhaps by offering a temporary rent reduction.
- Price to sell: Regardless of whether a home is a distressed property or a regular sale, price is important to most homebuyers. Don't choose a realty agent solely on the basis of his or her pricing recommendation. Do your own homework, researching for-sale homes online and visiting local open houses, before you make a pricing decision.
Pros and cons of a short sale
Price-sensitive buyers who are in no hurry to close on a home with forgivable flaws may find a good value in a short sale transaction, and shouldn't have to worry about liens or hidden fees as they might when buying a foreclosed home. Still, the delay can be significant and homebuyers might miss out on other viable properties while they wait for the process to conclude.
Home sellers who keep their property in good condition and price it aggressively can alleviate financial pressure from mortgage debt and escape credit rating consequences associated with foreclosure. If waiting for housing prices to rise isn't an option, a short sale may be a seller's best recourse.