Getting a "Deal" with a Short Sale House

We hear a lot of buzz about short sales these days….Buyers call and say, “I want to buy a short sale or a foreclosure house!” For home buyers, a foreclosure or short sale can often be a good deal, although this is certainly not always the case.

But what, exactly a short sale? A short sale, or “short pay” involves the seller’s lender agreeing to accept less than what they are owed in order to avoid foreclosing on the house. Why would they do that? Contrary to popular belief, the banks really don’t want to own houses, or go through the huge amount of time and expense to foreclose on, and re-sell a house, which is why they will often agree to a short sale.

How much of a discount will they accept & what kind of bargain can you expect to get?

The final sales price is based on a negotiated figure, usually somewhere between the seller’s lender (who wants to get as close to a full payoff as possible!) and the buyer (who generally wants to pay as little as possible!). The lender will do an appraisal to find out what the current values are in the neighborhood, and what the specific value of the house is based on its condition. In today’s market these homes often appraise for much lower than the amount owed by the seller. This means the bank will need to agree to accept “current market value” for the home in order to avoid foreclosure. After all, if they foreclose, they will just have to re-sell the house in the same market! You can see how a short sale becomes a give and take between the seller’s lender and the buyer.

Perhaps surprisingly, many short sale properties are in good to excellent condition! Others need work – ranging from paint and carpet to major rehabilitation projects. The value of the property is definitely impacted by the shape it’s in. Either the buyer or the lender is eventually going to have to pay to fix it up! Banks generally do not concern themselves with the fact that a house needs new paint or carpet, or other “cosmetic” fixes. They will, however, allow significant discounts for real damage, such as missing cabinets, broken stairs, damaged roofing, foundation problems, plumbing problems, fire or smoke damage, mold infestations and the like. Buyers making offers on homes in good shape will probably not get much of a discount from the average market price, but that’s not to say that there’s not some “wiggle room”.

Short sale buyers do need to be aware that banks can take a long time to make a decision to approve or disapprove an offer. For example, I just closed on one that had been in negotiation for six months. Some are approved in 45-60 days, but there is no way to know what the timeline is, so just be prepared to wait for the house you want. If you make a short sale offer, you are not tied to that property, like you would be with a regular buy-sell contract. In Colorado, the short sale addendum to the contract will allow you to get out of the contract for any reason right up until the short sale is approved. This means you can continue looking for other homes while you are waiting for the bank to approve your offer, and if you find one you like, you can buy it, and terminate your other offer with no penalty. (The seller can also change their mind right up until the approval as well, but that is a rare occurrence.)

Short sales can be great deals – if you are willing to put in the time and patience. We’re expecting to see more of these come on the market as the next wave of foreclosures begins to roll across Colorado and the nation. So, don’t be afraid – just be prepared for the process!