So you’re in the market to buy a house, and every bargain you come across is a short sale. Is this an opportunity for you, or is there something to stay away from? Depending on your situation, it could be an opportunity or a taxing experience on your patience and your purse?
What is a short sale? A short sale occurs when the current owner of the home (not the bank at this point) owes more money on their mortgage than the amount they will net by selling their home in the current market. For example, if Hue Homeowner bought his home five years ago for $200,000, he may still owe $175,000 five years later. Hue Homeowner now needs to sell his home, and due to a declined market, the home is now worth only $160,000. If he sells his home and pays $10,000 in closing costs, the sale will only net Hue Homeowner $150,000 before the mortgage pay off. One can see that if Hue only has $150,000, and he owes the bank a total $175,000, Hue still owes the bank $25,000 after the $150,000 he gets from the sale of his house. If he is financially incapable of paying this difference of $25,000, and the bank accepts this hardship, the bank can approve the sale of the property SHORT of what is owed.
Short sales definitely create a different experience in purchasing. Most of this experience is one of uncertainty as the banks will seemingly hold onto your offer for a long period of time. I would advise that one can expect the process to take around 2-6 months from offer to close (I would not, however, guarantee 6 months).
If you have a home to sell, the uncertainty of the length of the transaction makes it difficult to sell your home if you don’t either A.) have temporary housing between the time your current house sells and your new house settles, or B.) have resources to carry both mortgages until you sell your current home.
Short sales generally bring a lower sale price for 3 reasons, the first being the limited number of buyers willing to put up with the uncertainty just mentioned in selling your current home (if you have one.) The second reason is that many homes in a short sale situation can have declining condition. These owners often are no longer able to financially support failing systems of the home. The third reason is that short sale banks limit the amount of closing cost assistance that they are willing to allow. Even if your loan type allows more, the short sale bank often limits your assistance to 3% of the sale price.
As always, I advise that you consult your Realtor to assess your specific situation and help you to make an informed decision in your purchase.