Short sales can represent a great deal on a home.

But what exactly is a short sale?

What potential pitfalls are involved?

We’ll answer these questions and give you some good advice to follow when buying a short sale home.

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What is a short sale?

A short sale is when the owner sells a home for less than the amount currently owed on the property. A short sale is different than a foreclosure because it is being sold by the owner, not the lender. Typically a short sale happens when the property’s value decreases and the borrower is underwater on the mortgage.

Short Sale vs. Foreclosure

Buyers who are in financial hardship have the option of a foreclosure or short sale. There are several differences in short sales and foreclosures. If you are behind on your mortgage and your home is not worth what you owe, you can contact your mortgage company to speak about your options.

How a Short Sale Works

When a property’s value drops by at least 20%, a homeowner can initiate a short sale with their mortgage company. The borrower is typically behind on their mortgage payments, and the home is underwater. Meaning the loan amount exceeds the value of the home. Because the mortgage is underwater, the homeowner cannot sell the home for enough money to pay off the loan.

If the mortgage company agrees to the short sale, the owners put the property up for sale for as much as they can get. The remaining balance may need to be repaid to the lender.

How Foreclosures Work

A foreclosure happens when a homeowner defaults on their payments and moves out or is kicked out of the property. The bank will now own the home and will market it as a foreclosed property. Unlike short sales, foreclosures are initiated and sold by the lender when they fail to make the monthly payments.

How to Find Short Sales

Identifying short sales isn’t always as straight forward as you may expect. Many homes that are short sales may not necessarily advertise it. Mainly because mortgage companies feel that advertising a home as a short sale puts them at a disadvantage because home buyers will expect to pay less for it.

You should be working with a real estate agent who may help you locate short sales. There are certain keywords you should keep an eye out for when looking at properties.

Keywords used to identify short sales

  • Pre-foreclosure
  • Notice of Default
  • Subject to bank approval
  • Offers may take 90 days to accept
  • Give the bank time to respond.
  • Preapproved by Lender
  • Headed for auction
  • Contingent

Advantages to Buying a Short Sale

Low Price – Price is really the main advantage of buying a home in a short sale. You can generally get a short sale property for a few thousand under market value.

Better Condition – These homes will generally be in much better condition than foreclosed homes. Because the owner initiates a short sale and is typically living in the property, they care a lot more about the home condition. As opposed to foreclosed homes where the owners were kicked out, and the home is vacant.

Seller Disclosures – Because the homeowners sell short sales, they come with seller’s disclosures. Disclosures are anything that is wrong or could potentially go wrong. These items include water drainage issues, plumbing, electrical issues, etc. The mortgage company sells foreclosed homes; therefore, they do not come with any seller’s disclosures are much riskier.

Less Competition – Offers are subject to approval by the owner’s mortgage company. Just because the seller accepts your offer doesn’t mean the lender will. There is usually a couple of months while waiting for the mortgage company to accept an offer. Because of the length of time it takes to get acceptance, many home buyers are scared off. Fewer buyers mean a better deal.

Hire an Agent with Short Sale Experience

Some realtors have a short sale and foreclosure experience, and others don’t. A short sale is much different than your typical home purchase. You will want an agent with short sale experience to protect your interests. Get referred to a real estate agent with short sale experience.

Submitting an offer

When submitting a home offer on a short sale, you will need to include a copy of your pre-approval letter from your lender. The mortgage company will only consider offers with a letter of approval. Do not be shocked if it takes a couple of months to hear anything back. You may even be asked to increase your offer for acceptance.

HUD Homes

HUD homes are foreclosed homes that had a Government mortgage; HUD stands for Housing and Urban Development. They take over homes with a Government-backed mortgage, like FHA, USDA, 203k, and VA. These HUD homes are marketed on the HUD website called the HUD Home Store. To submit an offer on any HUD home, you will need a real estate agent.

Bottom Line

If you’re considering buying a short sale property, there are some things you need to know. While these homes are usually marked below market value. You may end up waiting a few months to hear back from a lender whether or not the offer is accepted.

Your offer on a foreclosed home will be quicker but be prepared to find a home that requires repairs. You should get a home inspection if you’re buying a short sale or foreclosed homes.

Now that you know what short sales and foreclosures are all about, are you ready to start looking?

Before you start searching for short sales, start by getting pre-approved for a mortgage.