A short sale is an agreed upon sales transaction that occurs when the value of a home falls below the amount outstanding on the mortgage loan. For example, suppose a property was purchased for $400,000 and the buyer secured financing for $350,000. If the value of the property drops to $320,000, the buyer is “upside down.” He owes more than the home is worth.

In such cases, the current buyer can approach the lender and negotiate the sale of the property for an amount less than the outstanding loan. If the lender consents as an alternative to foreclosing, the property is prepared for a short sale.

New buyers are attracted to these properties because they initially seem like a bargain. In reality, there are many reasons to avoid them.

Tip 1 – Long Wait With An Uncertain Outcome

As the housing market began to crumble a few years ago, lenders’ portfolios of short sale candidates started to grow. As a result, a backlog formed and quickly grew worse; lenders found themselves overwhelmed with the number of “troubled” properties on their books. Few deals received adequate attention.

For this reason, it’s not uncommon to move forward with a potential purchase only to watch the transaction languish for months. Many realtors refuse to pursue these properties.

Tip 2 – Phantom Equity

A common mistake on the part of short sale buyers is to presume a home that has declined in value has built-in equity. This is a fallacy based on a misunderstanding of market values.

Using our earlier example, it would be a mistake – a costly one at that – to presume the home has $80,000 ($400,000 less $320,000) in built-in equity. The equity evaporated with the decline in market price.

Tip 3 – Additional Expenses Before Purchase

Most of these homes for sale are listed on an “as is” basis. The lender, in agreeing to accept a lower offer than the amount outstanding on the loan, is rarely willing to pay for repairs, inspections, and certifications. That means you will need to pay for termite inspections, roofing repairs, a home warranty, and other costs typically handled by the seller.

Tip 4 – Lack Of Seller Urgency

During a conventional transaction, the seller is usually eager to move forward. He or she is anxious to cover costs associated with buying and moving into a new home.

With a short sale, the dynamic is completely different. The seller is merely trying to avoid a foreclosure. However, when he or she discovers the impact of a short sale and a foreclosure on a credit report are similar, their urgency disappears. This can needlessly prolong the transaction.

Tip 5 – Lender Savvy Eliminates Bargains

Those who are looking for short sales often think they’ll stumble upon astounding bargains (for example, houses with built-in phantom equity). Lenders are informed about property values. They are unlikely to offer distressed homes for sale at a price that is significantly below its market value.

Tip 6 – Last-Minute Changes

Short sale transactions are unpredictable because the lender can make last-minute changes to accommodate their interests. Making matters worse, the lender may not be particularly motivated to sell the distressed property in the first place. For buyers, this can be endlessly frustrating, especially given the already longer-than-normal sales process.

Is it possible to uncover a bargain in short sale properties? Yes, but doing so is rare. The market is more efficient than many buyers suspect. If a short sale home is priced at $320,000, it is because that is the market value for that property, not because of an inefficiency in the market. If you are still interested in pursuing troubled homes for sale, work with a realtor who has experience with this type of transaction.

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Category: Real Estate
Keywords: short sales, short sale, avoiding short sale, why you should avoid short sale