by Marci Leigh

Created on: April 10, 2011

Short sale homes can appear to be an opportunity for a buyer to purchase a home at far less than the current value.  To determine if you should pursue making an offer on a short sale property, it is important to understand the differences in purchasing a short sale versus purchasing from a seller or purchasing a foreclosure.

A short sale is a property that is offered at a lower than market value price by a seller in the hope of avoiding foreclosure by their lender.  The key to this type of sale that it is the seller’s lender who will accept or reject an offer.  The lender will gather offers and then determine how much they can afford to sell the home for; in other words, how much of a loss are they willing to take.

Unless the seller’s lender has agreed to allow a short sale prior to receiving an offer, which is very rare, be prepared to wait 2, 3 even 6 months to have an offer accepted or counter-offered by the lender.   The main reason is that the seller has to qualify for a short sale.  They have to provide proof of their hardship.  The lender has to evaluate the reality of the seller’s hardship.  The lender also wants to wait before negotiating on the first offer to see if multiple offers can be generated.  Buyers are often most frustrated by this part of the process, but a lender is no different than a private seller.  A private seller most often would not accept an offer that would result in a financial loss and a lender is not in the business to do that either.

A short sale offer has to be evaluated by a loss mitigation department by the lender.  Many buyers think they can speed up the offer acceptance timing because they are a customer of the current lender.  This process is not at all about the buyer’s relationship with the lender, but only about the amount of the loss the lender is willing to take on the property.

Most buyers also cannot understand why a lender would not accept any reasonable offer in a short sale rather than take the property in foreclosure.  What they do not know is that if there is Mortgage Insurance on the loan, the lender can often recoup more by doing the foreclosure.  The MI is not paid if the lender does a short sale.

Short sales are further complicated if there is more than one lien on the property.  The primary lender is in line first.  If the seller has a home equity loan, (commonly called a 2nd mortgage because that lender is 2nd in line in the event of a default), that lender also has to agree to accept a loss.  Often there are situations where the primary lender agrees to a short sale offer, but the 2nd lender does not as they will recoup more by letting the home go into foreclosure.  Why should the 2nd lender accept $5,000 on a $40,000 outstanding loan?

Buyers often expect sellers in a short sale to fix items found on their home inspection.  The seller is out of money; they can’t pay their mortgage which is why they are pursuing a short sale. 

Unless you can invest 3 to 6 months waiting to see if your offer will be accepted, do not even view any home offered as a short sale.  Remember, the seller, who is experiencing financial hardship, will continue to live in the home and probably not be performing any maintenance work.

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