The Challenges of Buying (and Selling) A Short Sale Home

As buyers look for the ‘best bargain’ in a home, most are curious about three types of bargain-basement properties: the Short Sale, the Bank-Owned, and the HUD Sale.

The Short Sale home is basically a pre-foreclosure sale. The owners have financial issues, have missed or been late on mortgage payments, and are looking at a possible future home foreclosure and/or bankruptcy. Their credit rating will then be seriously impaired and there will be a period of time where they won’t be able to own a home. They may have already tried to sell their home, but the price at which they need to sell is higher than the market value, and there have been no offers.

At this stage, a realtor often becomes involved who has experience in proposing a short sale to the lender. The owners present a hardship letter along with a packet of information for the bank to consider, asking for time to get the property sold.

The lender has said it will consider a price that is lower than the payoff amount of the loan.  The advantage to the lender is that this loss will be less than the losses the lender will incur with a foreclosure. 

In a perfect world, the sale happens, the lender takes a small loss, and the owners have minimal damage to their credit so they can move on and even buy another home if they wish.

Here’s where things get tricky.  First of all, the bank has said they will think about it- there are no guarantees they will decide to accept an offer.  Banks are also notoriously slow and can take weeks to come to a decision.  It’s the bank making the final decision, not the homeowners.  There are also ‘addendums and qualifications’- the home is sold ‘as-is’, the buyer needs to be pre-approved, there is lots of bank paperwork (that their lawyers have created) absolving them from everything.  Last of all, many of these properties have two mortgages- the primary mortgage and the equity mortgage (an equity loan is the same thing).  There are frequently two lenders involved in these mortages, so you have two sets of people deciding if things will fly.  (If you’re a betting person, figure the odds on this scenario moving along smoothly and quickly.) 

So…. the seller is hoping and praying things will work out, and the buyer is often waiting for weeks for answers and hitting one brick wall after another. 

SELLERS- Two things- first, your credit score will be affected in a negative way, and second, the amount of debt the lender forgives is still considered taxable income- and Uncle Sam is going to want his share. For example, if your mortage is $100,000 and the bank agrees to settle for $90,000, you are going to have to pay taxes on the $10,000 that was forgiven.

BUYERS- If you’re an impatient buyer and in a hurry, a short sale is not for you.  If you want a perfect house that doesn’t need maintenance and possible repairs (remember, you’re buying the home as-is, and there’s a good chance the previous owners did not have the money to keep things up to high standards), a short sale is not for you.  If you detest paperwork and bureaucracy, a short sale is not for you.

If you’re a handy fix-em-up person, patient with the world and its craziness, and looking for an opportunity to gain some ground on equity…… a short sale home could be your ticket to paradise.

(Note: for MORE issues to face on Short Sales, click on this later post….)