Buying a home that is a short sale is the same as buying any other house, the only difference is that the whole deal is subject to third party approval. That third party is the bank that is holding the mortgage for the current homeowner.
In a normal transaction, if the current seller has a mortgage, when they sell their home it is paid off in full at the closing table and the seller walks away with the difference. In some cases, a homeowner's mortgage may be higher than the value of the property. This typically would be the case with a buyer who purchased a property at the height of the market (2007) with a no money down type deal. Back then the banks would lend you up to 106% of the value of the property. You could literally purchase a home without spending any of your own money at that time (you cannot do that any more, although US military vets can still get a mortgage with no money down). Often times those same purchasers had variable rate mortgages (which went up a great deal over time!). Then, when the US economy collapsed back in 2008 and home values went down, many of these people could not afford to pay their mortgage or just plain didn't want to because the value of their home was now so much less than what they owed.
This is how short sales started. As a potential purchaser of a short sale type home, you have to keep in mind the following:
1) Even though the seller accepts your offer and goes into contract with you, it does not guarantee that you will get the house. This is because the bank that holds the current mortgage has the final say.
2) The larger the disparity between what is owed to the bank and how much the bank will receive at the closing table... the less likely it is that the bank will approve the short sale.
3) Banks determine how much they are willing to take based on an independent appraisal of the property. If the appraised value is significantly higher than the price you are paying, the deal will most likely be declined.
4) It can take a long time to get the answer from the bank. Sometimes it can be as quickly as 60 days, other times it can drag on for a year. During this time you will be obligated to the seller and not able to purchase another property due to your contractual obligation. Because of this you should always have a time limitation in the contract of sale (say 90 days) whereby you have the option to pull out and get your down payment check back if things do not seem to be working out right.
5) When purchasing a short sale, you should put as little money down at the signing of the contract as possible, your lawyer can help you with this.
If I can be of further assistance, please let me know. Good luck!
Mitchell S. Feldman
Associate Broker/ Director of Sales
Madison Estates & Properties, Inc.
Office: (718) 645-1665/ Cell: (917) 805-0783
Be sure your Realtor has experience with short sales. The more experience the better. A short sale is different than the normal real estate purchase: you will essentially have to wait while the Seller negotiates with their Lender(s) for approval to sell you the house at a price lower than what is owed to the Lender(s). This process can be lengthy, even stretching out to many months before you have a final answer.
You'll need two things during that time:
1. Patience. While you've submitted all your documents to your Lender for your mortgage approval, and you keep your documents current and updated, you'll grow frustrated with the lack of any communication from the Seller about the status of the short sale. This is common, both the poor communication and the Buyer's frustration. Prepare for it.
2. Maintain your credit scores. Be sure not to make any dramatic changes to your credit report that could affect your credit scores. Pay all bills on time. Don't CLOSE any accounts. Don't open any new accounts. Don't run up your outstanding balances to max your revolving debt.
Once the short sale is approved, you may find the price you offered is not acceptable to the Seller's Lender. They may come back and counter-offer your price, so you will have to reconsider at that time if you wish to pay more than your original offered price.
The three rules of real estate: Location, Location, Location.
The three rules of short sales: Patience, Patience, Patience.
I hope that helps!
If you need someone, I'm always available to meet face-to-face...
Sterling National Bank
Otherwise, the prior response is a pretty good description of many short sales.