Understanding Short Sales for Buyers

You have heard the term "Short Sale," but what exactly does it mean? What "short" refers to here is that the seller, after paying expenses that go with selling a home, will not have enough money to pay off what is owed on the mortgage. So they are short on what they need and they want the bank or banks (if more than one mortgage) to agree to take less. Understanding this is the easy part of dealing with short sales.

If you haven't heard, short sales can at times take many months to just hear back from the bank. The reason for this is that the bank wants to make sure that the seller doesn't have the money to pay the difference. The bank will require the seller to provide a lot of financial information before they make a decision. Some banks are better than others at handling them in a smooth and efficient manner, and it helps if the listing agent is knowledgeable on short sales. Many times a home is listed as a short sale with the hope that when the offer comes in the bank will agree to the short sale because it is more cost-effective for them than to incur the cost of foreclosure.

Expectations

If you decide to make an offer on a short sale be prepared to wait. You can give a deadline for an approval by the bank, but understand that the bank is not concerned on timing, especially if it is a large bank such as a Wells Fargo or Bank of America. Typically 3 months is a normal time frame. If you need to be out of your place in 60 days, a short sale probably isn't a good fit.

You love the home, you offered the list price, so it is just a matter of time and the bank will accept your offer...right? Not necessarily. It is not an automatic, while there are now some banks that do BPO's (another way of saying appraisals) right when the home is listed, most still wait for an offer to come in. I have seen homes on the market for over a year that ended up receiving offers and the bank countered 10% higher than it was listed at. One problem is that the banks aren't involved right from the beginning, so they at times feel like the seller and the Realtor just want it sold and they get too aggressive on price with the banks money.

Should I stay away from these?

This all depends on your situation. If you don't have a strict time line and are aware of the issues that come with pursuing a short sale, there is no reason not to consider them. One of the benefits is that there are less people willing to look at short sales and in most cases you can figure out when a price drop is coming. There are also a lot of short sales right now and the banks are improving (for the most part) on dealing with them.

More questions about Short Sales?