How Does Buying a Short Sale Work?

Determine whether a short sale property is worth the price.

Determine whether a short sale property is worth the price.

Buying a short sale could work out for you, but getting involved in the process is a mixed bag. A short sale usually occurs when a person owes more on a house than what it’s worth. Many people paid an inflated price for a home during the housing bubble. When home prices crashed in 2008, those people found that they actually owed more money on the home that what they could sell it for. Rather than continue to pay the inflated price for the home, many of these homeowners try to get the lender to agree to accept a mortgage payoff for less than what they owe. This could mean a bargain for you, the buyer.

Be Prepared to Wait

Buying a short sale differs from buying a traditional home. Short sales take much longer because there are a lot of back and forth negotiations going on between the seller, the lender and you. The seller has to get the lender to approve the short sale, and many banks won’t agree to accept a short sale unless the seller provides proof that he has a buyer. This process can take six weeks or six months, and in the end the lender may not approve the deal. In fact, the short sale process was taking so long for so many people that the federal government stepped in to institute the Home Affordable Foreclosure Alternatives Program (see Resources), a program designed to speed up the short sale process, but only for mortgages guaranteed by Fannie Mae or Freddie Mac.

Get Help

If you want to buy a short sale, once you find the property yourself through a for-sale-by-owner ad or through an agent, you should get help from a real estate agent experienced in short sales, or from an attorney. Because this is not a usual transaction, you should deal with someone who knows the process.

Research the Property

Look over the property to determine whether it needs repairs. If it does, find out how costly the repairs will be. Figure out whether you are actually getting a good deal. Just because the house is a short sale doesn’t guarantee a good price. The bank is still going to try to get what the market will bear. Check other houses in the neighborhood to determine what they have sold for. Have the homeowner sign and notarize a letter to send to the bank that gives the lender permission to discuss the short sale proceedings with you. Otherwise, you will be in the dark.

Prepare for Financing

Once you sign a purchase contract on a short sale and put down the deposit, you need to close on the sale as soon as the lender requires, which could be only 20 days. That doesn’t give you enough time to shop for a mortgage. This means you need to have your financing arranged in advance. If you don't have financing arranged, you may be able to finance though the lender that processed the sale. This might be the fastest route because that lender already has your paperwork.

Photo Credits

  • House for sale image by Heng kong Chen from Fotolia.com