Many buyers, especially first-timers, are enthralled by the prospect of buying a short sale — and it's not hard to see why. Bottom basement sale prices make these transactions seem like a no-brainer. Unfortunately, most of the time, these too-good-to-be-true deals also come with a huge catch.
Before you commit to buying a short sale, read this first. We've outlined a few red flags that you should be aware of prior to taking the plunge. Take the time to consider each of these possibilities and decide if you're prepared to take them on, If so, you can move forward having made an informed decision. If not, then you know that focusing on traditional sales will probably be a better fit for you — one less thing to worry about!
It Could Take a Long Time to Settle
The term "short sale" is misleading. Rather than describing a transaction that can be settled quickly, it actually refers to the fact that a bank has agreed to let the sellers come up "short" on their loan in order to avoid foreclosure. In exchange for this opportunity, the sellers have agreed to give the bank the final say when it comes to accepting an offer. Before the sale can move forward, the offer must go through a lengthy approval process, which can take up to 3 to 6 months, on average.
During the approval process, the bank must first review the sellers' financials — their debts and assets — in comparison to the proposed sale price in order to decide how much of a loss they're willing to take. That documentation must be reviewed by several different departments, which often slows things down significantly. Additionally, if there is more than one loan on the property, each bank will need to make sure that the offer satisfies its needs.
You'll Need to Pay Most of the Transaction Costs
In a normal sale, buyers and sellers have a chance to negotiate who will cover the closing costs, aka the one-time fees associated with the sale that are collected at settlement. (The exact charges will vary, but they can include anything from the cost of inspections to property taxes and title insurance.) Both parties will also negotiate who is responsible for taking care of any necessary repairs on the property.
Since the bank is already taking a loss on the value of the loan in a short sale, it's unlikely that they'll be willing to assume any further costs. Most short sale contracts include a clause where the buyer agrees to take on sole financial responsibility for covering these fees, so if you decide to move forward, be sure that you have enough immediate cash on hand to account for these additional expenses.
→ What's included in closing costs? Here's a short guide.
You Could Be Held Responsible for the Sellers' Debts
When a debt goes unpaid, a lien or judgment is filed with the court system. Some will follow the individual who's responsible for the debt, while others get attached to a particular property. In a typical sale, a title company or attorney will perform a search to identify these debts and work with the seller to resolve them before settlement.
In a short sale, things may go a bit differently. Depending on the seller's financial situation, these debts may become assumed with the transfer of a deed, meaning that anyone who buys the home will automatically become responsible for their repayment.
Bottom line: Be sure to read all of the paperwork that comes with a short sale carefully before submitting an offer so that you'll be informed of the specifics of that transaction. You should always know exactly what you're agreeing to before signing any legally-binding documents.
More first-time-homebuying basics, right this way:
- A Real-Numbers Breakdown of My Actual Mortgage Payment (and Why Online Calculators Can be Misleading)
- From the Credit Check to Getting the Keys: Answers for the Big First-Time Homebuying Questions
- A Glossary for Beginner Buyers: Real Estate Terms Every Aspiring Homeowner Should Know
- Lessons from My First Year of Homeownership (That I Wished I'd Known Sooner)