What is a short sale?
A short sale is a transaction in which the lender, or lenders, agree to accept less than the mortgage amount owed by the current homeowner. In some cases, the difference is forgiven by the lender, and in others, the homeowner must make arrangements with the lender to settle the remainder of the debt.
A short sale can also be the best option for a homeowner who is “upside-down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.
In the real estate industry, a short sale transaction occurs when the lender agrees to let the homeowner sell the property for less than what’s owed on the mortgage. In this case, the mortgage lender agrees to accept less than the remaining mortgage balance in order to avoid having to go through foreclosure proceedings, which can often be costly and time-consuming.
For the most part, a real estate short sale follows the same pattern as a traditional sale. However, rather than the seller having the ultimate say in who ends up buying the home, the seller often has to ask for lender approval before accepting any offers. As the buyer, you’ll ultimately have to negotiate with the lender in a short sale transaction.
Meanwhile, in a foreclosure, the homeowner has no say in what occurs. In this case, the lender has the right to sell, the right to sell the property to the highest bidder at a foreclosure auction. Once that happens, the former homeowner is eventually evicted.
Buying Short sale:
Pros
• You’ll likely get a deal on the home: Since the mortgage servicer is agreeing to sell the short sale home for less than is owed on the mortgage loan, you can often get these properties for less than fair market value. As an investor, getting a deal on the purchase price can be a great way to improve your bottom line.
• It’s more like a traditional real estate transaction than a foreclosure: Buying a short sale home is typically thought to be easier than buying a home at foreclosure auction because it functions more like a traditional real estate transaction. In this case, you can work with a real estate professional, and you have the opportunity to read through the short sale package before deciding to submit an offer.
Cons
• Short sale negotiations can take a long time: The short sale process can often take a long time to complete. Often, an offer needs to go through multiple rounds of lender approval before it can officially be accepted. Then, throughout the course of the transaction, there’s usually quite a bit of red tape that needs to be handled.
• You’ll be buying the home in “as-is condition”: Since the lender is already accepting a loss on the mortgage balance, they’re likely not going to be willing to negotiate with the homebuyer any further. Usually, this means accepting the home in as-is condition and, sometimes, it can also mean accepting financial responsibility for any title problems, including a deficiency judgment or lien.
• Short sale approval isn’t guaranteed: Even if your short sale offer is accepted, this is one situation where you don’t want to count on owning the property until you actually have the keys in hand. As mentioned, offers usually need to go through multiple rounds of lender approval before the mortgage company can officially accept a loss. So short sales often fall through at the last minute.
Reference: (National Association of Realtors – NAR)
