Whether you are a first-time homebuyer or a seasoned real estate professional looking to add to your portfolio, buying short-sale homes can be a lucrative way to move into home ownership. Short sales, often also known as “distress sales”can be a way to build instant equity in your new home - but they come with their own set of risks and potential costs. Some of these potential costs may be unknown or hard-to-impossible to estimate at time of purchase, making some short sales a risky option for buyers who don’t have a lot of cash on hand, or access to liquid equity.
A short sale occurs when a home owner defaults on their mortgage and enters the foreclosure or pre-foreclosure process. It is called a “short sale”because the bank/mortgage lien holder will come up “short”on the sale: the net proceeds from selling the home will be less than the mortgage currently owed on the home. In short sales, banks are looking to unload properties at a loss, but before they progress further down the foreclosure process, which can ultimately cost the lender even more money.
Some short sale homes are sold in immaculate condition, similar to traditional home sales. Others unfortunately, are sold in conditions that will require (sometimes extensive and expensive) repairs. When homeowners are unable or unwilling to pay their mortgage payment each month, the risk that they also cannot or will not pay to repair their property rises. This is why short sales can be risky - you don’t always know the condition of the home when you buy it and have little to no leverage to require the seller (in this case the bank) to make repairs.
According to a recent report by the National Association of Realtors, short sales homes were discounted about 10% off listing price, although for some homes in some markets, the discount on a short sale is significantly higher.
In a typical or traditional home sale, the homeowner sets the asking price of the home and also negotiates offers received, regardless of whether or not there is a mortgage on the property. In a short sale, the homeowner does not set the sale price of the home, the bank does. This is because the bank owns the home and the bank stands to lose money on the short sale. How much money the bank is willing to lose will vary from short sale to short sale; a realtor with experience with short sales should be able to give you better information about the short sale home you are considering making an offer on.
It can be hard to know how low a bank will go on a short sale - some banks price their short sales right at the bottom amount they will accept and so you must decide whether or not you are comfortable with their asking/set price and whether you determine that price and home to be a good deal for you. Other banks and lenders will list short sales at very low prices, hoping to attract more prospective buyers and ideally, a bidding war which will drive up the offers on the property.
Although short sale closing timelines can move as quickly as traditional home sale closings, you also shouldn’t be surprised if 90 or even 120 days pass between when you submit an offer to a bank and when you ultimately close on the home.
Additionally, one of the biggest differences with buying a short sale as compared to a traditional home sale is that the buyer has little leverage to ask the seller for concessions, like having the seller cover the buyer’s closing costs or requiring the seller to make certain property improvements before sale. Because the bank is already losing money on the deal they are not likely to entertain requests for additional concessions.
That said, buying a short sale property can be an excellent way to get into home ownership - especially if you are handy and can do repairs that a property may need yourself. Short sales offer the opportunity to get great deals on homes and allow buyers to build home equity quickly.
If you are thinking about purchasing a short sale home, either to live in or to flip or to turn into an investment property, we recommend working with an experienced short sale realtor and lender. Short sales can come with considerable red tape and working with an experienced short sale real estate professional who can cut through that red tape can save you time, headache and money in the long run.