Dear Ring Ring:
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