A short sale means that the owner of the home owes more to the bank than the home itself is worth (i.e. “under water” or “upside down”) and now wants to sell. The owner is in a bad spot, as he or she will get little or nothing from the sale, and the bank is losing out, big time.
And that’s the number-one thing you need to keep in mind when considering a short sale property: The owner's bank, which has nothing to gain, is going to take a long, long time to make up its mind and get the deal done.
If you're ready to take the plunge and make an offer on a short sale, "never be afraid, just be cautious," says Alla Kimbarovsky, broker for Illinois-based @properties. "Have a good professional representing you."
Why Things Move in Slo-Mo
The owner must be in default on the loan and must prove to the bank why he or she can’t cough up the cash, whether job loss, disability, death or other. "The owner provides documentation to [the] bank that [he or she] absolutely cannot pay more," says Kimbarovsky. "The bank goes through a very tedious process to validate the owner’s claims. Everything must be disclosed to the bank. It could take six to nine months for the bank to approve the short sale — or even longer."
Be Prepared for Repair Work
The home isn’t necessarily a beater. It could be in perfect condition and the owner under water due to tanking home prices. If the property seems like a hot mess, be sure to go through the home with a reputable home inspector, builder or contractor who can spot and diagnose the home's problems. And don’t forget to make calls and get estimates for the repairs, so you understand exactly what you’ll face, financially.
Why NOT to Invest Your Heart
A home that's up for short sale may be worth the wait. If you have the time and money to make necessary repairs, you could end up with a great deal. "But you may wait and hope and still lose the deal if the bank will not approve the owner's hardship," says Kimbarovsky. In that case, you will get your earnest money back, so you won't really have lost anything but your time. And your high hopes.
Know the Lingo Before You Press Go
What is the difference between "approved for short sale" and "third-party review required" in a short sale listing?
The first phrase is preferable; the second one, not as good. Approved for short sale means the owner's bank has already said OK to the reduced list price, which means that things may proceed swiftly. Third-party review required means that the process of getting the bank's OK is still to come.
Get a Handle on Added Expenses
The owner's bank won't agree to any extra costs that the owner usually pays. For example, the bank won't cover any repairs. Also, some counties, towns or states impose real estate transfer tax stamps. The cost of these, normally paid by the seller, may fall to you.
Expect the Unexpected: Wait, What?!
There could be a second mortgage on the property. This means the owner took out a loan on the home's equity and has two loans: the original one, plus a home equity loan or line of credit. The first bank could approve the short sale while the second bank could say no to the deal.
Consider Closing a Moving Target
Closing time is not up to you. It’s up to the owner's bank. In fact, after six months of waiting, you could suddenly get the call that you're closing at the end of the month. Then you and your lender are left scrambling to prepare, a process that can be confusing for a first-time buyer. To avoid a mad dash, have your lender lined up and ready to move quickly.
A Roving Eye is A-Okay
Even if you have a contract on the house, there's nothing stopping you from looking for something else while you wait. You can always cancel the deal, and the owner's bank won't really care. It will trudge along with the seller, and you can go on your merry way.