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What you need to know about short sale homes

Are you the kind of person who is always looking for a deal, or maybe a way through the back door? If so, a short sale home may help you buy a home for a significantly lower price than you normally would have through a traditional home sale.

What buying a short sale home means

To understand what it means to buy a short sale home, we first need to define how a home falls into the short sale market. A short sale occurs when someone sells their home for less than what they owe on their mortgage. As the seller, you’re relieved from your debt, but walk away with nothing from the sale.

As the lender, you recognize your losses but avoid the complications of foreclosure. Each party — the seller, buyer and lender, must be willing to compromise throughout the journey.

Once the short sale goes through, the lender receives the profit of the sale to settle the loan. There is a tradeoff to this win-win, however. The short-sale process tends to be more time consuming and labor intensive than the traditional buying process.

How are short sales different than foreclosures?

Short sales are different than foreclosures in that during a foreclosure, the lender repossesses the home and evicts the former mortgage holder, who is still liable for the debt owed.

How to buy a short sale home

Still interested? Here’s where to begin.

The seller’s to-do list

Before selling a short sale home, the seller must seek approval from the lender. To do this the seller must provide:

  1. A hardship letter: A letter that proves your inability to pay off your loan because of extenuating circumstances such as a death, loss of a job or illness.
  2. A list of liens on the home: If legal claims against your home from a creditor exist, including remaining mortgage payments, you’ll need to show them in order to get approved.
  3. A competitive market analysis (CMA): A CMA is an aggregate of recent home sales that accurately estimates the current value of your home.
  4. Proof of income and assets: If the lender finds that the seller has assets that can be used toward their mortgage payments, it’s unlikely they’ll accept the request for a short sale.

The buyer’s to-do list

The advantages and disadvantages of buying a short sale home

  1. Seek out short sales in your desired area. You can find applicable homes using a qualified short sale home agent, typically by searching online or looking through local public courthouse files.
  2. Research home values. Based on the above research, if the seller owes more on the home than they own, this means they don’t carry much equity and are desperate for a buyer.
  3. Go and visit the home. Assess the quality of the property and get a sense of how much you’ll need to fix up and estimate the costs so you know what you’re getting yourself into.
  4. Sort out liens and outstanding items with the lender. Before committing yourself as the official owner, make sure all of the loose ends are tied up so that you’re free to move forward once the sale is official.
  5. Present paperwork and negotiate terms. Whether it’s a short sale application, the seller's paperwork or your financing plans, get everything together to submit to the lender. Since the lender is agreeing to sell the home for less than the original purchase price, be prepared to negotiate and determine the maximum you’re willing to pay.
  6. Shop around and prequalify for a mortgage. Presenting your financing to the seller and lender proves your financial capabilities and can help expedite the process.
  7. Sign on the dotted line. Once the seller, buyer and lender are aligned, you can officially sign the papers, transfer the title and close on the property. Congratulations on being a new homeowner!

The advantages and disadvantages of buying a short sale home

As you can see, buying a short sale home has a few more steps than going the traditional route but can come with certain perks. As a buyer, you can get a home for less than its appraised value. As a seller, you can save your credit score from more damage. If you’re lucky, your lender may agree to report your mortgage as paid in full to the credit bureau. As the lender, you can avoid the paperwork and future transactions that come with foreclosure.

The main downside of buying and selling a short sale home is that the deal often falls through. Your lender may not agree to list it as short sale, your candidacy may not be enough, or the lender may decide to foreclose if they aren’t getting good enough offers. As the buyer, short sale homes are usually fixer-uppers, meaning you’ll likely have a lot on your plate once the deal goes through.

Buying a short sale home is a unique way of doing real estate but can be worth the team effort and compromise for all parties in the end.

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