Real Estate: What is a short sale?
If you are in the market for buying a home then you will most likely run into a house that is listed as a short sale. A short sale is a house that is on its way to foreclosure, meaning the owner has either stopped making payments or is behind in payments, but the bank has not repossessed the house yet. The owner of the house owes more money on the mortgage than the house is worth and so the last option before foreclosure is to try and sell the house for as much as possible. Once the highest bid comes in the owner presents the offer to the bank, and the bank will either accept the offer in which case foreclosure is avoided, or reject the offer and its back to where you started.
Here is an example of a short sale situation
John bought his house 10 years ago for $500,000. Since that time the housing market crashed and John's house is now worth $250,000, but John still owes $350,000. 6 months ago john lost his job and has been unable to pay his mortgage. In an attempt to avoid foreclosure John puts his house up for sale for $225,000 and he takes the best offer he gets and sends it to the bank. The bank will either accept the offer or send a counter offer.
Things you need to know about short sales
Since the owner is in a dire situation the listing price will often be lower, so short sales can appear to be great deals on homes but there are many things you need to be aware of before you place a bid. The first thing is, despite its name, a short sale is anything but short. The owner of the house will move quickly but once the offer is submitted to the bank things grind to a halt. The banks can take weeks or months to decide whether or not to accept the offer. Another thing is that the bank has all the power in decision. You may be the highest bidder but you may wait for months only to find out that the bank wants more money. The last thing is that the listing agent of the short sale might have put a very low price on the house to get lots of bids in quickly, but the banks will do their homework and know what the house should be selling for and demand more money. Again making you wait months and months only for disappointment.
Approved short sales
There is one other thing to look for when you see a short sale and that is to find out if the short sale is approved by the bank. An approved short sale means that the bank has told the owner what amount they are willing to accept for the sale of the house. In the above example when the bank sent a counter offer back to John he would then re list the house for the counter offer price and say its an approved short sale. Since the price is approved the competition for the house can be fierce.
Why short sales exist
Many people wonder why a bank would allow a sale of a house for so much less than what is owed, and the simple answer is that foreclosure is very expensive for a bank. When a house forecloses it is closed up until the bank has time to get to it which can be months or years. In that time the house is deteriorating and the bank must pay property taxes. When the bank finally gets to the house it will probably cost the bank more money to fix it than they would have lost in a short sale.
Get help from a professional
If you are considering bidding on a short sale just make sure you are willing to wait and be flexible with the bank's needs. The best thing you can do is partner with a real estate agent who has experience with short sales, their experience will be invaluable since they will be familiar with local prices and how banks have been reacting to local short sales.