Understanding How Short Sales Work

When you are ready to buy a new home there are many options available to you. As you look through the many properties on the market you’ll notice that there are many different types of listings, for sale by owner, foreclosure, upside-down, and short sale. If you are new to the real estate industry chances are you’re more than a little confused about what all these terms mean. In short, they all mean basically the same thing. The seller is unable to continue to pay his mortgage and needs to get out from under his financial burden. Purchasing a home under these conditions could prove profitable but you still need to be aware of what these types of transactions entail.

The Basics of a Short Sale

With a short sale, the lending institution has accepted a condition of hardship from the homeowner and has agreed to accept less than the balance owed on the mortgage. This situation while seemingly dire can be beneficial to the bank as it saves them the cost of repossessing the home in foreclosure and then reselling it. It also benefits the seller by freeing them from their financial burden that is damaging their credit.

How it Works

A short sale allows the property to remain in the possession of the homeowner rather than default to the bank. The bank is not the property owner but merely the holder of the lease. However, the agreed upon price on the sale of the property must be approved by the bank since they are the ones that will be taking a loss on the property and not the seller.

The Contract

When purchasing a short sale property the contract will differ slightly from the traditional sale contract. In a normal transaction the seller is the only party that needs to approve the sale. They have to agree on the price and the terms exclusively. However, with a short sale it is the bank that has to give the approval of the terms.

The contract also needs to include the term “as is” so that the buyer is aware that chances are the property will most likely be in need of some repairs. While it is perfectly acceptable to include specific details in the language that allows you to vacate the deal after an inspection reveals major problems it does not usually allow for you to renegotiate with the bank for a lower price on the sale. Asking the bank to fix or update the property in any way will not be possible.

Of course there are many pros and cons that come with buying a short sale property and only you can decide if it will be the right investment choice for you. For the savvy investor there are many good deals to be discovered that could prove to be a virtual gold mine and a short sale property is an excellent way for first-time buyers to get into a home that they may not be able to afford otherwise. Take your time, weigh all the options, and be patient and you will soon find the right property for your next real estate investment.