Buying a Short Sale – Worth the Risk?

With the decline in real estate prices seen in the last few years and a high rate of unemployment, many property owners have found themselves owing more on their property than it can sell for in the current market and unable to continue making mortgage payments. The term underwater is often used to describe homeowners who owe more than their apartment is worth. With more and more frequency, underwater property owners are turning to short sales to sell their apartments and avoid foreclosure.  While some markets like NYC have fewer short sales than others largely due to the high number of buildings that require a significant down payment  short sales appear in nearly all markets.  As a buyer, you may be considering purchasing a short sale and wondering if it is worth the risk. While that is something only you can decide, you should know the risks associated with short sale transactions before moving forward with a purchase.

In a traditional real estate transaction, the only entity that has to accept your offer is the seller. With a short sale, your offer must be submitted to the sellers lender for approval, which can take 90 days or more. If you need to purchase property quickly, or dont have the patience to wait for lender approval, you should not consider purchasing a short sale.

Potential no from bank

After waiting, sometimes for months, to hear if the sellers bank has accepted your offer, occasionally the answer is no. This could mean submitting another offer and potentially waiting for months (again) to get a response, or being forced to move on to a different property.

Counter-offer from bank

The bank may decide that your offer is not adequate, but instead of saying no they may make a counter-offer. Your options are to accept or walk away and start over with a different property.

Deadline to close

Should the bank accept your offer, after waiting for months, you will be presented with a deadline to close. Because of this, you need to have all of your finances including down payment, closing costs and mortgage financing in order and ready to move as soon as notice of acceptance is received. The most common timeline is 30 days to close once the offer is accepted.

Not necessarily a bargain

There is a notion that buying a short-sale is a great way to get a bargain. In reality, just because someone is underwater on their house doesnt mean that youre getting a deal. It just means their home had a higher market value three, five or even seven years ago than it does today. When you purchase a short sale, youre buying a property at current market value. Particularly in New York City, where the market hasnt been hit as hard as in other parts of the country, its much more likely that youre just paying a fair price for your property, as opposed to getting a bargain.

As-is

Due to the nature of a short sale, with so many different entities losing money on the transaction, you will not be able to request repairs on the property before purchasing. You will be buying as-is, and as with any real estate purchase, you should do due diligence and have a professional inspection before deciding if youre willing and able to take on any problems that may need to be addressed with the property.

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This entry was posted on Tuesday, October 4th, 2011 at 2:41 pm and is filed under Tips for Home Buyers. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.