If you're in the market for a new home, odds are you've come across at least one property that's been listed as a short sale. At first, many short sale homes may seem like a great deal, but it's critical that prospective home buyers understand the implications of this type of home purchase and do their research before putting in any offers.
What Is A Short Sale?
A property listed as a short sale means that the asking price for the property is less than the amount the former owner owed on the mortgage. The fact that the homeowner makes less from the sale than what he owes on the property makes him “short” in paying off his mortgage. After the home is sold, the bank holding the mortgage agrees to forgive the rest of the amount owed on the mortgage.
This type of home sale is similar to a foreclosure except for the fact that the lender has not taken the property back. Instead, the owner is usually the one handling the sale of the home. However, although the owner sets the asking price of the home, the lender has to approve the terms of the sale. One benefit for the lender, in this case, is that it avoids the time-consuming and expensive process of a foreclosure and doesn't have to deal with the sale of the property. Prospective home buyers are tempted by short sales since it often means that a home is listed below its fair market value. However, there is often much more to consider than just the sale price when looking into a buying a home through a short sale.
Things To Keep In Mind About Short Sales
Various economic hardships in recent years have caused more homeowners to fall behind in their mortgage payments. Other homeowners have been forced to move to less expensive residences. As a result, short sales are more common in real estate listings these days. Therefore, it's important that prospective buyers understand what issues and challenges they may face when dealing with a short sale property, such as:
- Sale Price: A common misconception is that the purchase of a home through a short sale is automatically a great deal. However, the fact that the mortgage lender is taking a loss does not necessarily mean that the home is priced far below market value. According to HSH.com, short sales are generally priced somewhere between 5 and 30 percent below the market value of a house. That is a pretty wide range so it's best to do your research about the property to find out if it's a really good deal before jumping in and making an offer.
- Property Upkeep: Because short sales occur when a homeowner is unable to make mortgage payments, it usually means that the finances in the home were already stretched thin for some time. As a result, it isn't unusual to find out that the property hasn't been cared for properly in the months or years leading up to the short sale. Therefore, a significant amount of maintenance and repairs may be needed to get the home in good shape. The investment required for those repairs should be considered when purchasing the home. For example, if you are buying a home for $10,000 less than the market value but it needs $30,000 in maintenance and repairs, the deal isn't as great as it initially appeared to be. That said, short sale homes are often in better condition than homes that have been foreclosed on.
- Time: One of the biggest challenges with a short sale is the time it takes to have a sale price approved by the lender. Because the seller has to have the lender approve of the terms, the sale can take much longer than with a traditional home purchase. It gets even more complicated if the homeowner has multiple mortgage lenders for the property, all of whom must approve of the sale before it goes through.
- Unexpected Fees: Since lenders are trying to recover as much of their lost costs as possible, they may add on extra fees for the buyer of a short sale home. These fees, if applied, are often about 1 percent of the sale price and might be listed as “short sale administration fee” or “short sale processing fee.”
- Profiting From The Real Estate Market: Some people buy houses through short sales with the expectation that the value of the house will rise, allowing them to sell the house for a profit. However, it is extremely difficult to predict when that will happen in the real estate market so buying a house for speculative reasons is always a risky decision.
Short sales can be much more difficult than a traditional home purchase, but it some cases it can be well worth the effort. One of the best things you can do to help you figure out this process is to work with a real estate agent with plenty of short sale experience. The other important step is to get educated on short sales. Doing your homework ahead of time can help you to get a great deal and avoid costly mishaps down the road.