Everything you’ve always wanted to know about short sales — but didn’t know what to ask!
Short Sale as a Buyer
If you’re new to investing in the Orlando Metro area real estate market or are simply interested in getting a luxury home at prices well below market value, you may have heard about short sales and wondered if they’re worth considering. Here at The Property Source, we want you to know everything that happens during a short sale purchase, so that you can make the right decision for your future goals.
What is a short sale?
Essentially, a short sale usually happens when property values drop or a home receives a low appraisal. Imagine that a property was purchased for $400,000 and after five years of payments, the owner has built up $50,000 in equity with $350,000 remaining in their mortgage. What happens if they want to sell, but the home is no longer worth the original sale price? If the seller can’t get an offer of at least $350,000, they’ll be “short” in the amount of the difference between the amount that they owe and the amount that the home sells for: a “short sale”.
What determines if a short sale offer is accepted?
One of the biggest factors is the lender: the bank or mortgage company that holds the lien against the property. Unless the lender accepts a payoff amount less than what is owed, the short sale won’t happen. Because the lender has to sign off on the sale price set by the owners, the process of buying a short sale almost always takes more time than a traditional home purchase.
As the buyer, you should be prepared to “hurry up and wait” — waiting longer than usual to see if your offer is accepted by the lender, while possibly having to rush through inspections and other requirements prior to closing on the property.
We recommend that you continue to look at other Orlando homes for sale while waiting for a response on your short sale offer. Why? Short sales are much more likely to stall out or fail completely, because of the “dance” among the lender, seller, and buyer. You should keep your options open, in case your short sale falls through.
Can I get a great deal by buying a short sale home?
Yes…and no. Unlike a traditional home sale, where we can strategically make an offer (and counteroffers) to bring down the purchase price, a short sale is a negotiation between the lender and the seller. The lender wants to get as much of the outstanding mortgage balance as possible, and the seller wants to avoid foreclosure. That leaves you, the buyer, almost completely out of the negotiation process.
A short sale property may be less expensive than the market average for the neighborhood, saving you up to 10% on the purchase price compared with surrounding homes. But, short sales also come with higher-than-average closing costs.
Another issue in short sales is the likelihood that you’ll be buying the property “as-is”. If the owners leave the home with no appliances, ruined carpet, holes in the drywall or other damage, you’ll need to factor in the replacement and repair costs when deciding if this will be a solid financial move. Use the wait time between offer and acceptance to save the funds for the purchase and any necessary repairs, and possibly look for trusted contractors and other professionals in the area who can jump into action if and when your short sale goes through.
What experts do I need for a successful short sale?
First and foremost, you’ll want to partner with an experienced real estate agent (like us!). Having a good relationship with a professional who has prior experience in short sales can save you a lot of time, money, and effort — in a process that is almost always lengthy and more expensive than you might initially anticipate. Your real estate agent can also give you insights into the neighborhood and surrounding communities, since there’s more to life than the size of a bedroom or number of bathrooms. Does the area have the amenities you need? What about the commute? The best agents make sure you have a complete mental image of what your life might be like in that home, and can help you not be overly distracted at the possibility of getting a “good deal” on a short sale.
You’ll also want to choose a reputable home inspector. Sometimes when buying a home, particularly in a hot “seller’s market”, you may feel pressured to make your offer with no contingencies and forego having an inspection done. Or, you might be tempted to shorten or skip the inspection period to get to closing even faster. We don’t recommend that! Especially in a short sale, knowing what you’re getting — from the attic to the foundation and everything in between — is crucial to ensure that this is a long-term investment you can live with (and in!).
Short Sale as a Homeowner
What if the shoe is on the other foot and you’re the one facing the possibility of a short sale? With so many ups-and-downs in the real estate industry, many homeowners wind up “underwater” in their mortgages, owing more than the home is currently worth.
If you find yourself in that situation, the first piece of advice is don’t panic. The Property Source have all of the expertise necessary to help you navigate the process of determining if a short sale is in your best interests and conducting that sale if you decide it’s the right step to take.
The Downsides of a Short Sale
Because a short sale involves selling your home for less than it’s worth, you will lose any equity you’ve built up in the home. For example, if you have a mortgage on your home for $500,000 and it sells at $350,000, a short sale at that lower amount means that any of the $150,000 difference you’ve paid towards the principal is kept by the bank.
Keep in mind that while many lenders will release you from paying the difference between the sale price of the home and any equity you’ve accumulated, some hold you to that obligation. You’ll want to get any lender requirements in writing before closing on a short sale transaction
The Benefits of a Short Sale
One of the biggest reasons for considering a short sale is to avoid going through foreclosure. Having a foreclosure on your credit history can lead to financial challenges for many years into the future, so it’s worth avoiding that if possible.
A short sale can also help you move more quickly than waiting to see if the lender will foreclose or if property values will increase dramatically. If you’ve been transferred or relocated for work, a short sale might help you get established in your new location sooner.
And, as mentioned previously, many lenders will release you from any remaining debt owed on the home. While no one wants to lose the equity they’ve built over the years, being able to move into your next chapter of life without being saddled by debt on a house you no longer own can offer priceless peace of mind.