A short sale is the process of selling a home for a price that won’t cover the cost of the outstanding mortgage. It’s a disheartening situation for sellers who find themselves in financial distress, although it can be their only option.
But for buyers, a short sale can be a chance to buy a home for below its current market value. As sweet as that might sound, this type of transaction can be far more complicated than it seems, and could even end up costing you more money than a traditional sale.
Before you take the plunge, it’s important to know exactly what you’d be committing to in the event that the lender accepts your offer. We’ve compiled a list of the biggest disadvantages associated with short sales. Whether or not you decide that this type of deal is right for you, we guarantee you’ll feel better knowing that you’re going in with your eyes wide open.
The sale could take months … or longer
Though the name might suggest otherwise, short sales are anything but short.
“Time is the biggest con,” says Noreen Parrell, a Realtor® with Better Homes and Gardens Rand Realty in Briarcliff, NY.
A short sale can drag on because of a third party like the seller’s mortgage company. In addition to getting approval from the buyer and seller, short sales also need to be approved by the seller’s mortgage company since it has agreed to take a loss on the loan.
Like many corporate institutions, these lenders don’t move quickly. “You could be waiting three to six months before the bank even accepts your offer,” Parrell says.
Many different parties will need to review the agreement and decide if your proposed sale price is acceptable. So be prepared to wait, especially if you live in an area where this type of sale is common.
While waiting for the sale to move forward, you could miss out on other more secure buying opportunities. So weigh the risks.
Buying a home as is can be costly
In a typical home sale, there’s a contingency period in which the buyers are able to perform inspections on the property. Afterward, they’ll negotiate with the sellers on any repairs that should be made in order to ensure that the property is in safe and livable condition. Typically, the sellers will either have the repairs made by a qualified professional or give the buyer a credit to go toward having them done after settlement.
However, “on a short sale, what you see is what you get,” says Sandy Straley, the broker with Rindlesbach Homes and Sunview Homes in Layton, UT. “You do not know about the condition of the mechanics of the house (plumbing, heating, cooling, and electrical) and how well they operate. There are no warranties on the property,” she says.
This is known as buying the home in “as-is condition,” meaning that whoever buys the property also agrees to inherit financial responsibility for any of its problems. Buyers of a short sale should be prepared for the possibility of structural problems, pest infestations, or any number of potential issues that might end up driving up the home’s cost over time.
Keep in mind that there’s also no guarantee you’ll know what the home’s problems are upfront. While some banks allow interested parties to perform inspections on the home for their own benefit, others might reject any offer that elects these contingencies. Since the banks are already taking a huge hit on the sale price, some won’t want to risk allowing a potential buyer to walk away after learning that a property requires extensive repairs.
Large upfront payments
From the get-go, short sales often require a larger payment to the bank upfront because banks are more likely to choose a buyer who can put down a cash offer or sizable down payment. Why? They view someone with cash as less risky than a buyer who needs a mortgage.
Depending on the terms of the purchase agreement, the buyer might also be responsible for any costs associated with the sale. This can include the cost of any resale certifications, an appraisal, or title insurance. While these are usually split between the buyer and the seller, in a short sale, the bank is often unwilling to take on any additional costs.
And although the buyer and seller might agree on one sale price, keep in mind that number won’t necessarily end up being the final purchase price. The bank could decide on a different bottom line or, if an appraisal is required, the buyer could be expected to pay market value. While typical sales often allow for negotiation in these areas, in a short sale, the financial burden will fall almost entirely on the buyer.
While short sales seem like a great deal at first, there’s a chance they could end up costing buyers in the long run. Before you tie yourself up in one of these transactions, make sure you know exactly what you’re getting yourself into. Hire a real estate agent who’s experienced in short sales, and make sure you’re prepared to handle any responsibilities outlined in the property’s purchase agreement.
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