Ever run across a home listed for sale and the words in the marketing remarks mention short sale? Often times there is no room to explain what a short sale is or what it involves so homebuyers may be left confused by the term and unsure if they should consider buying a short sale home or not. This article explores what a short sale home exactly is and discusses whether homebuyers should consider purchasing a home that is being sold as a short sale.
What Does Short Sale Mean With Regards To Selling A Home?
A short sale is the process whereby the mortgage lender agrees to allow the homeowner to sell their home for less than the amount that is owed on the mortgage. A mortgage lender does not have to agree to any sale of home unless they are getting paid in full everything owed to them. Mortgage lenders generally have a first position lien (generally the highest priority in rank unless taxes are involved) meaning they must be paid off first with the proceeds from any sale.
A homes value may be less than the amount of the mortgage due to factors such as a decline in the overall value in a neighborhood, the homeowner owing more than the home is worth (this is not as common as it was in the past when lenders allowed 125% mortgages but can happen with multiple loans like a regular mortgage and home equity loan), a condition issue with the home or land, lack of upkeep or something else. Where the homeowner plans up making up the difference between a home’s sale price and the amount of the mortgage by paying out of pocket there is no short sale situation and the lender will not care so long as they get the full amount of money owed on the mortgage back.
The homeowner may be selling for any number of reasons such as they have to move for a job change, they cannot afford the mortgage payments, or the condition of the home makes it unlivable for them. A lender may agree to allow a home to be sold via short sale as the alternative of foreclosure could be a longer, more drawn out process where the homeowner has little incentive to cooperate with the lender and could cause further damage to the home out of spite. By allowing a short sale the lender in theory may be able to get back more money than through a foreclosure.
The home seller who needs to sell their home short should consider whether their loan or state laws provide that the loan is recourse or non-recourse. In a non-recourse loan or state the bank has to accept whatever cash the home for sale gets and cannot go after the homeowner for the difference. In recourse loans or states with recourse laws the lender can sue the homeowner after the sale to try and get back any amount of shortfall between the actual loan amount still owed and the value of the home. Whether the lender will be successful in getting that difference back is another story and the cost of suing to get the money back sometimes may be more than the amount of money they would expect to get back. Of course in recourse or non-recourse loans the homeowner can expect a big hit to their credit scores since the lender will note on their credit files that the homeowner needed to sell their home via short sale and could not pay back the full amount of the mortgage.
Should You Consider Buying A Short Sale Home?
As mentioned above a home being sold short may not necessarily be in the best shape nor be presented the best as the owner has little incentive to invest more money into getting the home ready for sale. If the homeowner is selling because they no longer can afford the home then their budget has already taken a hit from past mortgage payments. Even so on the other hand if it is more a matter that the neighborhood value has declined there is still not much incentive for the seller to put a lot of money into making the home look nice when the price they get will be less than the mortgage payoff amount and they could be liable to make up the difference down the line.
Especially homes with condition issues like a bad foundation, roof problems, water damage, don’t expect the home seller to be able to address those issues. As a buyer it will often be the case of what you see is what you get. You can have the home inspected in order to make sure there are no major hidden issues but outside of trying to ask the lender to accept an even lower offer amount don’t expect much in the way of negotiation either from the seller or from the lender. Some lenders may not even entertain further reductions in price due to condition and then your option as a buyer is to take or leave the property as is. So the best bet is to approach a short sale property as you would any other property and make sure all inspections are done to have a full understanding of what you are truly getting when you purchase the home.
Also a short sale will not be a fast process where the homebuyer and seller agree to a price and then are able to close in thirty days or less. In the past before lenders had proper systems and/or departments in place to handle short sales it could take a lender 6-12 months to even look at a short sale offer and get back to the buyer. The last housing crisis forced a lot of lenders to learn how to better handle short sales so for many it will not take that long currently. But do expect to wait a couple of weeks prior to the lender providing a yes or no answer to an offer.
When the real estate market is hot as it has been recently with sales happening rapidly and multiple offers being common you should fully expect the lender to wait to collect as many offers as possible and then ask for final and highest offers before they make a decision. After all the lenders are trying to get the maximum amount possible for the home in order to collect as much money as they can towards paying off the mortgage. Once the lender accepts an offer then begins the process of inspections, appraisal (for purchases being made with a mortgage), and more which can add another 30 days to the wait. Meanwhile the seller may only be minimally taking care of the home to the extent it is livable for them.
A short sale is the process whereby a homeowner wants to sell their home for less than the amount of the mortgage on the home due to some reason. The mortgage lender who lent money to the homeowner for that home must approve any short sale offer. An offer to purchase a short sale home is not a quick process and can take many weeks or months before the buyers can call the home their own.