Is Buying a Short Sale Right for You?

Is Buying a Short Sale Right for You?

A short sale is a pre-foreclosure property owned by the current owner that may or may not be in default, but needs to sell their property as a result of financial problems. The sale must be approved by the seller’s lender first because the lender has to write off the difference between the sale proceeds and what the seller owes on their mortgage. Because of declining home values, many homeowners are upside down on their mortgages. Short sales save the lender, seller and buyer money. The lender does not have to institute foreclosure proceedings. The seller does not have to go through the costs of a formal foreclosure process. The buyer gets to purchase a discounted property at or below market prices.

Short Sale vs. REO

So is a short sale right for every buyer? If you have the time and patience then the answer is yes. However, if you sold your home and must move into another one right away or are participating in a 1031 tax exchange, then a short sale is not the right investment for you. First of all, short sales take at least 3-6 months if not longer to get approved. There is no guarantee that the seller’s lender will even accept your offer. They may counter or not respond at all if the seller has assets and does not qualify for a short sale. Most of the time, buyers get tired of waiting and cancel after a few months. This can work to the benefit of the next buyer though if the lender has pre-approved the short sale based upon the first buyer’s offer. A pre-approved short sale can close quickly. So if you find a pre-approved short sale, you can expect it to close within 30-60 days. A pre-approved short sale improves your odds because you already know the price the bank wants, and the bank wants to close quickly and get their money. If you have cash, you have a much better chance of getting your short sale approved as well.

REO’s (real estate owned) properties are also good investment choices. They are already owned by the bank, and close quickly. You don’t need cash to purchase an REO, although it gives you an advantage. REO’s are also sold at discounted prices like short sales. However, the advantage of buying a short sale over an REO is there are fewer buyers interested in short sales because they take longer, and there is uncertainty as to whether or not they will get approved. Both are good investment opportunities though.