A short sale is when a lender agrees to clear the seller’s mortgage debt for less than the seller owes. The seller made a down payment on the mortgage and might have built equity, but has not been able to break even or make a profit on the sale. A changing market may have erased the equity the seller had built so that they now owe more than the home is worth. Basically, the home is being sold for substantially lower than the seller’s purchase price, which can mean a bargain for you.
The lender is the one taking a loss on a short sale. Because of that, short sales can take longer than most home purchases or may not happen at all. If you’re a buyer and have a locked low interest rate or need to move within a short period, this could cause problems for you.
To qualify for a short sale, the seller must prove financial distress to the lender, including W-2s, bank statements, payroll stubs, termination letters, financial statements, a letter explaining the hardship, and more. The lender then must substantiate the current market value of the home to verify what the seller says – that they can’t sell the home for enough money to clear their debt and transaction fees. Lenders also have to protect themselves from fraud, such as straw buyers turning around and selling the home back to the homeowner cheaply, for a favor or a fee.
Before you make an offer on a home that is advertised as a short sale, talk to your real estate professional:
- Verify that the seller has provided required short sale documentation to the lender.
- Verify that the seller’s lender has agreed to a short sale, and that it is not simply wishful thinking on the part of the seller.
- Find out the amount remaining on the seller’s note.
- Verify market value as well as pending market value, especially if it is lower.
- Choose an offer price that is high enough to cover the note, but is still below market value.
- Make your offer contingent upon the lender’s written acceptance of the short sale terms.
Remember that a short sale has risks and rewards. You may get a home for less, but you’ll have to work harder for it to close.