Buyers
A Short Sale, or Pre-foreclosure, is a sales transaction in which the seller's mortgage lender agrees to accept a payoff of less than the balance due on the loan. A short sale may or may not involve a property in foreclosure. Properties are more likely to become short sales when the market is soft and the rate of home price appreciation is low. However, the loan is generally the main instigator for a short sale. The loan in a short sale is often subprime, highly leveraged, negatively amortizing, includes a pre-payment penalty, or all of the above. While the property is marketed by the homeowner, ultimately the decision on selling is up to the mortgage holder (or holders).
Generally, short sale properties are priced to move quickly, so as the purchaser of a short sale, you are in a position to buy a property under market value. Some believe the opportunity for the best values are in short sales, not REOs.
The bank does not want to keep the property, but they are also not in the habit of giving money away, so a key consideration for them is making sure a short-sale home is going for fair market value, as determined by an independent appraiser.
Another factor that a bank will take into consideration when approving a short sale is how far along in the foreclosure process the homeowner is... Foreclosures cost banks easily $30,000 to $40,000, including the missed mortgage payments, fix-up costs for neglected property, legal and filing fees, and various carrying costs. It is conceivable that if the bank has already incurred most of the expenses and is ready to foreclose anyway, they will, since any possible cost savings from a short sale have already diminished.
The main drawback for the purchaser of a short sale is the waiting...and waiting...and more waiting...for answers from the lender. If you have the time and patience for a fairly lengthy process, you will have the advantage over competing buyers who can't or won't wait.
Short sale transactions are not typical ones. Because the lender is taking a loss, they will scrutinize the homeowner's situation carefully, as well as all terms of the sale. You can wait for a response from a lender for several weeks only to find out that they will not approve the sale and have chosen to foreclose instead. Although this is the exception rather than the rule, it is certainly a possibility, and one that you need to be aware of when purchasing a short sale.
In some instances, it might be advisable to continue to search for homes that you can fall back on, in the event the short sale is not approved.
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