A short sale sounds exciting-like purchasing the perfect designer jeans from the clearance rack. These pre-foreclosure listings could offer excellent investment opportunities. There are many things bargain-hunters and buyers who love these short sales.
What is short selling real estate?
A short sale happens when a homeowner wants to sell their home for less than the mortgage. Although the transaction is beneficial to both sides, it can also have negative consequences for mortgage lenders that must approve and process the sale.
What is short sales?
Short sales may be required if the homeowner is financially unable to pay their mortgage. They might decide that they want to sell their home. They might hand over their keys and move out. While the sale will not generate any income, the owner will not be charged anything beyond what they owe for the mortgage loan.
The homeowner must initiate pre-foreclosure sales. However, the lender must approve any short sale applications. They will then negotiate with potential buyers and accept their offers.
Agents or sellers may refer to their listing as a “short sale.” However, the listing cannot be valid unless the lender signs off on the seller’s short sale application.
Search to find short sales approved by lenders. Slow-moving banks don’t have too much time to decide the price they will settle for.
Short sales are when the home’s current market value is lower than the remaining mortgage. The “underwater property” is a property with a lower value that the remaining mortgage.
Pandemics seem less likely now that home prices have risen across the nation and interest rates are at an all-time low.
We’ll start with cons because there are many for investors.
These pros will be of interest to short-sale buyers
- Make more down payments. Use as much cash as possible to secure a great deal. Lenders who are trying to reduce their losses should consider cash. Bidding wars may be possible.
- Allow more time to wait before closing the deal. Sometimes you might have to wait for up to six month to see if your offer was accepted. You can also counteroffer to restart your process. Short sales may not be possible if paperwork isn’t received in time. Sometimes, processing can take longer than expected. Complex transactions can take up to one-year to close.
- Low success rate. It can be difficult to get approval from all lien holders. It is possible for your offer to be accepted after waiting months.
- Surprise ransom. Even though the primary lender may agree to your offer, secondary lien holder could ask for thousands of dollars to release claims.
- Sold as-is. Leaky roof. Is there anything strange about the basement. The lender is already losing money and will not accept any concessions to fix structural or cosmetic problems.
- Higher renovation costs. Hire contractors or be ready to DIY. Sometimes, short sales can be used to buy fixer uppers as investments. Cash-strapped homeowners that couldn’t pay their mortgage were also putting off upkeep.
- Seller’s closing fee payment. A lender might insist that the buyer cover the seller’s costs. This is not possible with traditional sales.
Here’s the good stuff. These pros will be of use to buyers who are looking for a quick sale.
- Lower price. This means you might get more for your money, but not bargain basement shopping. Accepted bids must be equal to or greater than the comparable property’s current market value. Savings could be lost due to renovation costs.
- Seller motivated. Loan lenders must reduce their losses but do this at a reasonable cost. Lowball offers may not receive a response today.
- Less competition. Properties with less experience in short-term selling get fewer offers.
Short sales are a great option for first-time buyers.
A short sale is an option for first-time homebuyers. This allows them to buy more houses at a lower price. New buyers need to be aware of the potential delays and risks involved before making a purchase on a short sale home.
Here’s why:
To obtain a short sale that is competitive, you’ll need to pay more down. If you’re preapproved for FHA and VA loans (popular government-backed loans), you will be in a disadvantage. Preapproval is required in all cases. Your lender should approve financing for short sales. There may be additional steps for non-traditional sales.
Even if the deal is approved by your lender , the offer must still be approved by any secondary (or senior) lienholders. They can cancel the deal or demand that thousands more be released from their liens.
Be ready for repair. First-time buyers need to have sufficient cash to fix the property they desire, as well as a large downpayment.
Note: If you accept your offer, and have liquid assets it could take up to to close the deal.
How to buy a home for a quick sale. Buyer tips and techniques
Are you still interested? This is a great tip to short-sales buyers.
- Look for a short-sale “approved”. It may be called a short-sale by the listing agent, but it doesn’t mean it is. Verify that they were approved by their primary lender for a short-sale.
- Get preapproved. You will need to be approved by a lender who understands the need for financing a short-term sale.
- Make an upfront payment. Be competitive and offer lots.
- Search homes with low equity. Lenders may resort to short sales when the loan amount is less than the actual home value. The lender will foreclose homes with more equity to make more.
- Get information about liens. An agent or seller should disclose any outstandingliens. This information should be verified with a title company. They will search for unreported claims.
- Conduct a thorough inspection of the house and get an accurate estimate before you finalize the deal. What are your plans to spend on the property? It is important to be aware of any potential repairs that might increase the cost of your offer.
Worth the short sale?
Despite their name, these sales do not offer huge discounts.
It is possible the seller paid too much for the property in a highly competitive market. The current value of the home is lower so it is being resold at a lower price. The loan officer will likely sell it at close to market value. However, the closing can take longer if the deal doesn’t go through.
First-time buyers have to consider the cost of a home, the timeline, down payment, certainty and potential costs for expensive repairs. You don’t want this to be a stressful process. It is possible to find a better home, with more upside and less hassle, on the market.
It can be frustrating and challenging to get keys for a short-sale home. Sometimes, it is better to pay retail price for your favorite jeans.