How to Purchase a Short Sale

So you found your perfect house and it happens to be a Short Sale? Well, before I walk you down the primrose path let me tell you a little about short-sales.

Perhaps you want to start by reading the page I wrote “How to Avoid Foreclosure with a Short Sale” to get a better idea of what a short sale is and what the steps the seller has to go through to negotiate with the 1st mortgage to get short sale approval.

Buying a short sale is almost like purchasing any other house on the market. The number one thing you have to be prepared for is that the time from initial offer to close is usually much longer. Although my record for closing a short sale is about 30 days, I normally tell my buyer clients that it could be between 60 and 120 days from offer to close.

Here are the most important things to understand.

You can get a great deal on a property:

Yes, you can save money by purchasing a short sale. And the amount you could save is always dependent on the lender’s appraisal. Lenders determine the value of the property with an appraisal. Using that appraisal they accept a percentage of the ‘as is’ appraised FMV (fair market value) as their NET. This percentage varies between 84% and 88% of the FMV and is determined by the length of time on the market. The longer the house is on the market the price goes down.

Keep in mind that even though it looks as though you will be saving 12% to 16% off the top; their NET must pay for their closing costs which includes any amounts they are paying on the buyer’s behalf such as (limited) buyer’s closing costs, title fees, and Realtor commissions.

You are buying the property “As is – Where is”:

This means what you see, is what you get. The lender isn’t going to fix anything. Not the roof, not the peeling vinyl floor, not the plumbing, not the air conditioner or heater. NOTHING! However, you do have the right to inspect the property just like you should if it were not a short sale. If the property has flaws you cannot live with, you can walk away just like a regular sale.

Unacceptable Settlement Costs:

Some ‘customary’ buyer’s expenses are not allowed in a short sale. Buyers can pay for them, but the seller and lender will not. Some of these expenses include:

• Repair reimbursements or allowances
• Home Warranties
• Discount Points or mortgage fees for non FHA-financing
• Mortgagee’s Title Insurance fees
• Third-party fees incurred by the Mortgagee or Borrower to negotiate a short sale

In Summary:

While buying a short sale can save you money, you need to be prepared and have some cash on hand for all of the expenses that are not allowed on a short sale through government guidelines. Be prepared to wait for seller/lender approval.