I've had over a half dozen clients this week ask me about short sales, what they are, and how they work. This page is going to help explain them in the best detail I can. I'll also talk about why they might be a good deal for you, and why they might not.
A short sale defined:
Quite simply, a short sale occurs when the seller owes more on a home than it is worth. If Sally Smith has a mortgage balance of $325,000 and her house is only worth $265,000 in the current market, Sally may be a candidate for a short sale. She can't sell the house for $325,000 because no one would pay that for it in the current market, so she's stuck unless the bank agrees to take less. If Sally's job transfers her from Atlanta to Pittsburgh, then Sally has is forced with some tough situations. She could 1) try to rent out her existing Atlanta home and become a distant landlord, 2) ask her company to cover the lost equity, 3) stop making payments and risk foreclosure, or 4) ask the bank to take less than is owed on the mortgage.
It costs a bank somewhere in the range of $30,000 to foreclose on a property. So a short sale might be a better option for the bank, as well as for the seller. In order for a short sale to be considered, a seller has to endure a mountain of paperwork and submit an exhaustive financial history including tax returns, retirement statements, bank account statements, credit reports, and more. In most cases, a seller will submit over 100 pages of financial documents to the mortgage holder before a short sale can be approved.
Why short sell?
One major reason: You only have to wait 2 or 3 years before you can purchase another home. Compared to a foreclosure's seven year waiting period, a short sale is the best option. Some recent federal guidelines only call for 24 months "seasoning" of the short seller's credit in order to obtain home financing.
Should I buy a short sale property?
The main issue that determines whether a short sale is right for you lies in timing. Short sale can take as long as 9 months to close. In most cases however, a short sale can close as quickly as 30 days in the best case scenario, or 120 days on average. The timing really depends on the bank and the resources on hand in the "Short Sale" department. If time is on your side, then you should consider a short sale. If you need to close within 30 to 45 days, my advice would be to avoid them.
Sometimes I see a property that says "Bank Approved Short Sale". What does that mean?