A short sale occurs when a lender allows a homeowner to sell their house for less than what is owed on their mortgage. For example, if a homeowner owes $300,000 on their mortgage, in a short sale, they might sell their home for $250,000, or $50,000 “short” of what they still owe.
Why would a lender allow this? Usually, a short sale occurs only after a homeowner has stopped making mortgage payments, often as a result of broader financial difficulty. Rather than initiate foreclosure proceedings against the owner, the lender allows the owner to list their home for a lower price, hoping to sell the property faster. In this way, the lender doesn’t have to go through the time and expense of foreclosing on the home. Lenders typically don’t want to own and sell real estate; they’d rather collect monthly mortgage payments. If the house sells quickly at a short sale, the owner doesn’t fall further behind on their mortgage payments.
Buyers benefit from the below-market price of a house sold at a short sale. It’s a chance to break into a market that they could otherwise not afford.
The challenges
It isn’t always easy to buy a house through a short sale. First, the buyer and seller must agree on a sale price. Then the seller’s lender must approve that price.
You might find a home you like and offer the seller $250,000. The seller might agree to this. But if the seller owes their lender $320,000, the lender may be inclined to reject the offer because they don’t want to take that much loss. In that event, you may have to boost your offer to a level that the lender would accept, perhaps $270,000 or $280,000.
The extra step of needing to gain approval from the seller’s lender can scuttle a short sale. If you aren’t willing to pay as much as the lender requires, you’ll have to look for a different house.
Additionally, short sales are often offered on an as-is basis. This means that the sellers won’t make any repairs even if a home inspection turns up serious problems. Buyers will have to determine whether the lower price is worth the cost of potentially expensive fixes and renovations.
It can also be challenging to find short sales. The best way is to work with a real estate agent who knows your market; they are best equipped to find these sales.
If you are interested in buying at a short sale, know that patience is important. You might find your ideal home and even reach an agreement with the seller. But that doesn’t mean your home purchase will close. It all comes down to whether that final sales price is high enough to satisfy the seller’s lender.
We welcome the opportunity to put our tax expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
©2024
