Here's What Home Buyers Need to Know About Short Sales

Maybe you've heard that a short sale can be a good way to pick up a home on the cheap. Here's what you need to know about the process before you jump in.

Buying a short sale can score you a sweet deal on a home. Since the sellers are set on avoiding foreclosure, buyers can jump in and nab a house below its market value. It might even sound like the easiest transaction ever: The seller is determined to sell a house and you have the means to buy it. It's good as gold, right? Not necessarily.

Though they might appear simple, short sale transactions are different from traditional home sales. There are a number of pitfalls and extra costs that can arise with a short sale. What is a short sale and how does buying a short sale differ from other transactions? Simply put, a short sale is when a home sells for a price that won't cover the cost of the outstanding mortgage.

Short sales are different from both traditional home sales and foreclosures. In a traditional home sale, you work with only the seller and the seller's agent to make an offer. In a foreclosure, the lender has already bought the property, so you’ll make an offer directly to the lender, without a buyer involved. In a short sale, the home is being sold at a loss. So, while the seller still owns the property, the lender must approve any offers.

Below are tips on what to expect and how to have your offer stand out from the crowd.

1. Have your finances sorted
Solid financing always makes an offer appear stronger, but this is especially true in a short sale. In addition to the pre-approval, being prepared to put down a sizable earnest money deposit can help move your offer to the top of the pile.

2. Be ready to wait for approval
The approval process is a bit different with short sales. The seller first has to approve your offer, as usual, but then it must be sent to the lender for review before the sale can move forward. Several individuals, including the lender, will need to look at your offer before a consensus can be reached. The lender must decide how much of a loss it's willing to take on the loan and it'll likely vet your finances to make sure you are financially sound enough to buy the home. This process could take weeks, but in most cases it will take three to four months.

3. Don’t expect contingencies
In a typical home sale, you can negotiate contingencies with the seller to reduce closing costs, cover fees, or make repairs before you finalize the deal. However, in a short sale, the lender also needs to be taken into consideration, and it is less likely to approve your contingencies. Keep in mind that the lender is already taking a loss on the loan and won’t want to lower its profits any further.

4. Don't navigate a short sale alone
The bank will be trying to recoup as much of its investment as possible, and the seller will be focused on unloading the property before it's foreclosed. So who has your interest at heart? It's important to have someone in your corner who can advocate for you and make sure you leave the negotiating table satisfied. Before you even consider making an offer, make sure to bring on a real estate agent—or even legal council—who specializes in this type of transaction.

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Learn More about the home buying process: "Home Buying 101: How Do I Get Started?"
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