Short sale properties are sometimes viewed as easy pickings because the sellers are in distress. But this is not often the case. In short, "short sale" is not mortgage lender code for "screaming bargain."
A short sale is when property is being sold for less than what is owed on it -- not necessarily for less than it's worth. Every short sale is not a bargain, so finding and working with a real estate agent who is very experienced with this kind of purchase is crucial. Ask a prospective agent to tell you which mortgage lenders are best to deal with when negotiating short sales and which are not. Ask what percentage of the appraised value you would need to offer to get an acceptance. These answers should come easily to an experienced agent.
How to Find a Good Deal on a Short Sale
It's certainly possible to get a good deal on a short sale since many investors manage to buy short sales at a discount from the fair market value of the property. The poor state of the housing market is a boon to investors and homebuyers looking to purchase homes sold at short sales, since many banks are overloaded with properties that homeowners can no longer afford. With a surplus of homes and a lack of buyers, banks may become more receptive to investors' discounted prices. Mortgage lenders typically accept between 75% and 95% of the property's appraised value. Why would mortgage lenders take less than the property is worth? If they have to foreclose and sell the property at auction, they may end up with an even bigger loss, and when they have to carry homes on their books, they have to deal with property management expenses and issues, as well.
Be aware that negotiating a short sale is no walk in the park.
Don't Expect to Steal the House
Mortgage lenders will only go so far. The price they are willing to accept is based on a broker's price opinion (BPO) on the property. Though it's not impossible to get them to go lower than that amount, it can be very difficult. Don't get the idea that an offer that's 50% below market value is going to fly, no matter what you hear. In addition, expect to have a tougher time negotiating prices in states that allow deficiency judgments; where the lender can come after the borrower for any balance not covered by what the property could fetch in a foreclosure sale. In such cases, you shouldn't expect them to be very interested in a short sale, which produces absolute losses. The odds are that the mortgage lender will require the seller to sign a note for the difference as a condition of completing the foreclosure transaction, unless the sales price is very close to what is owed on the property. Banks are not giving homes away.
It Can be a Lengthy Process
It can take anywhere from one to six months to close on a short sale. In addition, many mortgage lenders won't even consider your offer until they have received several so they can compare them. Another obstacle is the seller. It is typical for mortgage lenders to require documentation of the seller's financial hardship, including a letter of explanation, pay stubs, bank statements, and more. If the seller dawdles, or has a sudden improvement in their financial picture (making the lender's loss recovery more likely), your short sale purchase is likely to be derailed.
One advantage of a short sale purchase is that you know the home is completely free and clear of any liens. If you choose to purchase a foreclosure property on the courthouse steps, you don't have that guarantee, and the property could prove far more expensive than you imagined.
If you put in the time and effort, enlist the help of a knowledgeable real estate agent, and don't become too attached to any particular house (experts estimate that only about 1 in 10 short sales is actually completed), you can get your next house at a nice discount.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.
