Should You Make an Offer on a Short Sale?

If you’ve been looking for a home for a while, chances are a listing marketed as a short sale has come across your radar. The price of the home probably caught your eye since it seemed to be way below market value. However, when signing a contract to purchase a short sale, there are many things you need to know.  A short sale is not like a regular purchase.

First, what is a short sale?

A short sale may very well be the last straw before a home goes into foreclosure. Indeed, often a short sale is processed while the home is already in foreclosure.  Essentially the owner of the property is behind on their mortgage payments. Instead of the bank foreclosing and taking possession of the house, the bank cuts a deal with the current owner to sell the property and use the proceeds to pay off as much of the mortgage debt as possible. Once sold, the bank will forgive the remaining debt.  Sometimes the bank will require the property owner to bring in some additional funds as part of the short sale approval process.

So, what should you look out for in a short sale transaction?

  1. In addition to the contract, you will also sign a short sale addendum. Be careful here, because some short sale addendums are very one-sided, and you may be trapped into a transaction for longer than you want to be.  Sometimes a short sale negotiation company is involved, and they will try to reduce your attorney review period, reduce your inspection period, make your earnest money non-refundable, demand that you pay the seller’s back HOA or condo assessments, require you to pay seller’s closing costs, lock you into the contract for 90 days or more, or make your earnest money all or partially non-refundable.
  2. If the seller’s lender does not accept the price you offered, you may receive a counter and an option to increase your price. This may not happen for weeks or months after you’ve signed your contract.  Your offer price is not necessarily going to be your closing price. Rather, it’s just a starting number for the negotiations with the lender.
  3. Depending on which bank the seller’s mortgage was with, a short sale may have to go through many different layers of approval from the bank and its various lienholders. A short sale is always contingent on all lienholders approving the short sale. The bank alone approving the short sale is not enough.
  4. In addition to bank and its lienholders, there may be other lienholders that are not being paid in full. This requires additional negotiation.  This means you are dependent on more than just the seller’s bank approving the sale.
  5. The purchase price might change on you. The bank first orders a BPO (broker price opinion) to see if the purchase price the buyer offered is fair.  If the purchase price is less than the BPO, the bank typically counters.  Once the buyer receives the counter, the ball is in his court.  He can accept, reject, or counter.  This goes back and forth until there is an agreement or one party backs out.  Just recently, our office had a short sale where the price ended up increasing by $30,000 after the BPO was received.  If the price goes up, does that give the buyer grounds to terminate the contract? Typically, yes.  Very rarely is a buyer committed to a higher price.  But it all depends on what the buyer agreed to in the contract or the short sale addendum.
  6. Short sales almost always take much longer to close than a normal transaction. Our office has handled short sales which take a couple months to close and others which take seven or eight months to close. The longest one we ever had took over two years, and four buyers came and went before someone finally stuck it out. The shortest short sale we’ve handled took three weeks. What does this mean for you?  If you are financing, it is important to keep in mind that your rate lock might expire due to the bank dragging its feet. If you need to move out of your current home within a certain time frame, buying a short sale is probably not the best option for you.
  7. Short sales are typically about as “as is” as “as is” gets. So, if the property requires repair, or if your inspector finds defects, do not expect the bank to pay for them or give you any credit.
  8. Unlike in a regular residential transaction, the sellers in a short sale do not provide you with a survey. If you want a survey, or if your lender wants a survey, it’s coming out of your pocket.

Despite all this, buying a short sale is not all bad.  You could be getting a home at an amazing value.  Just do your diligence.  If the price is good enough and you have time to wait, you may end up with the home of your dreams!