Buying a home in a short sale can be a great way to get a bargain on a new home. Short sales occur when a homeowner who would otherwise be facing foreclosure enters into an agreement to sell the home for less than the balance due on the mortgage. The lender agrees to allow the homeowner to do this so the expense and hassle of foreclosure can be avoided. Because you are getting the home in what amounts to a distress sale, many people believe that short sales can be a great deal for a buyer. They can be, if you know what to expect.
The Short Sale Process
Buying a home in a short sale involves several steps including:
- Making an offer on the home. This should be a formal written offer, just as you would make on any home, and should contain contingency clauses that are appropriate to protect your interests. For example, you may be able to make your offer contingent upon the home passing inspection although this is not always possible if the home is sold as is. When buying a home in a short sale, be sure to check with your real estate agent on what is appropriate to include in the offer.
- Sending the offer to the lender who holds the mortgage note. The lender will need to approve both the offer and you as a buyer, so you will likely need to include information such as a mortgage preapproval when the offer is sent. When buying a home in a short sale, you may also need to make an earnest money deposit at this point, locking you into the agreement if the lender approves it.
- Obtaining lender approval and closing on the transaction. It may take several weeks or several months for a lender to approve buying a home in a short sale and the lender will generally perform a valuation on the home first, looking at comparable sales and market factors to determine if your offer is reasonable in light of current real estate values. Your own lender will have to approve your mortgage as well, usually based on an appraisal of the home and on a review of your financial and credit information.
Short Sale Tips
It is important to note that your offer in a short sale is not approved or accepted without the lender agreeing to it, even if the homeowner agrees. To streamline the process and make the purchase of short sale homes easier, many banks have programs that buyers can enter into prior to listing the home for sale. As such, the easiest way of buying a home in a short sale- and the fastest way- is to find a buyer who is in one of these programs. Sometimes, the bank will even approve an amount they will agree to sell the home for prior to the home being listed, and this can make the process even faster if you are willing to pay that figure.
Even if the lender has simply approved the sale and not a price, you will still have a better chance of actually completing the transaction and of completing it in a reasonable time frame without your earnest money being tied up for months.
Buying a short sale can be a complicated but rewarding process. It is best to have the help of a real estate agent who specializes in short sales to make sure the transaction goes as smoothly as possible. It is also important to do your due diligence on the property and homeowner to make sure the deal you are getting really is a good one.