The Benefits of Buying a Short Sale
We’ve talked about the differences between short sales and foreclosures before, but there are distinct benefits to buying a short sale.
A short sale occurs when a homeowner agrees to sell their house for less than the amount owed on the mortgage loan. This could be for a variety of reasons, such as financial hardship, the owner winding up with two mortgages after purchasing a new home and having trouble selling their old one, an underwater mortgage, or failure to modify the terms of the loan.
Whatever the case may be, a short sale always requires the lender to approve the deal. While short sales sometimes leave sellers owing money to the lender, they also provide an alternative to foreclosure, which benefits the seller by helping them protect their credit.
There are benefits to you as a buyer as well, not the least of which is the increased likelihood of a cooperative, reasonable seller, which isn’t always the case if you’re purchasing a foreclosure that’s still occupied by the previous owner.
When you purchase a foreclosure, you as a buyer could be forced to take legal action to force an eviction if the previous owner is still living in the home. It’s also not unheard of for (understandably) angry homeowners to cause deliberate damage to the property before they leave, which you as the buyer are then left to deal with.
With a short sale, the seller is usually a lot more eager to complete the sale because they derive a benefit from the sale going through. For one, a short sale is much less damaging to their credit report than a foreclosure, and allows them to recover and buy a new house more quickly. In other words, a sense of recovery and new home ownership on the horizon puts the seller in a much better position.
This mutually beneficial rapport between you and the seller may facilitate the exchange and get the deal closed more quickly.
You can’t forget, though, that the lender has to approve this deal. You have some leverage with the knowledge that the bank is going to prefer a short sale to a foreclosure, and this works in your favor as a buyer. That’s because the bank knows that the current owner likely has insufficient resources to pay his or her obligations so they’d rather do what they can to recoup their loan costs as opposed to continuing to receive no money on the property.
While the bank has the option of foreclosing on a delinquent property rather than approving a short sale, foreclosure comes with its own disadvantages for the lender. Banks know that foreclosing on a property will cost them even more money in terms of eviction and administrative costs, not to mention expenses related to fixing up the property to prepare it for resale. Even after a foreclosure, the bank has no guarantee that the property will sell.
An empty bank-owned property leaves the lender faced with maintenance expenses each month until a seller can be found, and this adds on to the expense of the actual foreclosure process.
Rather than continue losing money, or wasting more money on a foreclosure, many banks offer buyers of short-sale properties favorable financing terms to make the sale more attractive. The lender may offer a low interest rate or other buyer-friendly terms to get the property sold and avoid further expenses.
Again, this is to your advantage as a buyer, but only if you’re seeking a loan with the lender who holds the mortgage on the property in question; another lender will have no such incentive to give you favorable terms. If you’re an investor, you may even be working with private financing.
So if you’re not seeking a loan with the bank that’s holding the mortgage on the property, how else can you as a buyer work with them and use the leverage you know you have?
This will involve some research on your end, and you’ll want to be ahead of the bank in determining the property’s market value so you know whether or not you’re getting a good deal.
Short sales can be beneficial for all parties involved, but as the buyer you need to know exactly who benefits and why, and use that to your advantage. It is by no means guaranteed that you’ll get a good deal, so you need to do your due diligence to find out if the short sale is worth the hassle in terms of pricing.
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- Get It Right Solutions