Short Sale: A Short-Sighted Move?

by Lauren Caggiano

Despite its name, a short sale has nothing to do with height. Instead, such a transaction is a means to take a property off the market quicker when the seller finds themselves in dire financial straits. In such a scenario, the seller’s lender agrees to accept a mortgage payoff amount less than the outstanding balance in order to help the struggling borrower.

What is a Short Sale?

In the simplest terms, a short sale occurs when a homeowner owes more on their home than it is worth. Typically, this occurs when a home's value decreases exponentially. This is getting more and more rare as the country's economy improves which, in turn, boosts the housing market. A short sale is completed with permission from the lender, and allows the homeowner to pay less than they owe on the house in order to get it sold. The lender does not get all of the money they loaned back, but they agree to a short sale in order to help a struggling borrower. 

The Process

As a buyer, you should know that buying a home through a short sale process is different from purchasing a foreclosed or bank-owned property. Such a deal is executed with the lender’s permission when a home’s value has declined and the mortgage holder is in effect underwater, or owes more than the home is worth. In such a negative-equity scenario, the homeowner is likely motivated to sell the home sooner than later. This is because the process is far less involved than a foreclosure and may be less damaging to the seller’s credit.

The Timeline

Speaking of timeline, buying a home this way can present some delays. That’s because it can take anywhere from two weeks to two months to get the blessing of a lender. So if you’re anxious to move in a timely manner, this might not be a prudent move in the end. You may run into other unforeseen issues, too. For example, some lenders reserve the right to renegotiate the terms of the deal at the eleventh hour. They may want to amend the contract based on market conditions, if new laws pass, or if other new relevant information comes to their attention. 

The Decision

So, is this a good idea, as a potential buyer? The short answer: It can be a mixed bag, so enter into the endeavor informed. While the buyer may find the price attractive, there’s a good chance the property will need a lot of work — and there may be some hurdles to overcome in terms of paperwork and timeline, among other things. Also, a lender may also require that a buyer pay additional closing costs that normally would be shouldered by the seller.

The bottom line? If you’re looking to purchase a home in the near future, a short sale may be appealing on the surface due to the bargain factor, but there’s more to the equation than an attractive price tag. Experts will tell you it’s better to purchase a home that's not in default due to all the considerations mentioned above. Also, having a real estate professional in your corner can save you from a possible (expensive) headache down the road.

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