The Truth about Short Sales

When we meet with buyers for the first time, part of our buyer counselling is to explain the difference between a short sale and a foreclosure and also explain the pros and cons of buying them.  I am sure anyone who has done online home shopping has seen a home pop up in a neighborhood they have had their eye on that seems like a deal too good the be true.  The chances are that that property is a short sale.  So what is a short sale?

Short Sale Example:

A homeowner named Bob bought his home at the peak of the housing bubble for $300,000.  The recession hit and home values in his neighborhood took a big hit.  Values started to recover in the past few years but his home is now only worth $250,000.  He owes $280,000 and he is having a hard time paying his mortgage every month.  If he stops paying his mortgage the bank will evict him from the property, take ownership and sell the property as a bank owned foreclosure sale.  In order to avoid being evicted and taking a large hit on his credit, Bob goes to the bank and asks them if he can sell his property at market value which is less than what he owes the bank.  The house is then listed on the MLS by a realtor at a price that is normally 15-20% below the market value.  Once the property is under contract with a buyer it has a contingency that states the sale is dependent on the bank approving the sales price and terms.  This process can take quite a while and in some cases up to 9 months.  Banks are in the business of lending money, not forgiving debt so they are not in any real hurry to approve a short sale.  At the end of the transaction, the buyers got a great deal on a home and the seller took less of a hit on his credit report and was not evicted from his home.  So whats the catch?

Who are short sales good for?

Buyers that have flexibility in their living situation are good candidates for short sales. Investors are also good candidates for short sales.  Any buyer that doesn't need to be in a property by a set date is a good candidate.  If you have the flexibility then you can potentially get a great deal on a home.  Buyers need to understand that more times than not, a short sale is being sold as-is so there are inevitably going to be repairs and updates that are needed once the sale is completed.  

In Summary.... Short sales are not quite as prevalent as they were several years ago.  They are a good opportunity for buyers if they have the ability to be patient.  A thorough inspection is needed to make sure that they know what they are getting.