Buying a short sale
A short sale, or pre-foreclosure, is a property that is offered for sale by the owner. It has not gone through foreclosure, although this may be in process while the home is on the market. The definition of a short sale is one in which the net proceeds of a sale at the asking price would not be sufficient to satisfy the outstanding mortgage and other debts on the property.
This means that the lender has a say in whether the sale should proceed at a particular price, because allowing the sale will require the lender to accept a loss. If the lender is aware that the home is being offered at a price that is below the outstanding debt, and in particular if he has already approved the sale price, the selling process can be quite straightforward. Unfortunately, this is not often the case, and first thing a lender hears about the sale may be when a contract appears on his desk. This is when short sales can become a bit of a nightmare.
A good way to identify a short sale listing is in the phrase 'the listing price may not be sufficient to - ", which is a requirement for any listing that falls in this category. This wording may not appear in the public description, though, and may be visible only to brokers, so ask me if it is unclear whether a particular listing is a short sale.
There are two forms of short sale. The first, and the easier one to work with, is where the lender is aware that the home is being offered for sale, and has approved the listing price that the owner has put on the home. That doesn't necessarily mean that the lender will accept any particular offer, even at or above the asking price, but it does at least show that a channel of communication with the lender already exists.
The other category, where the seller has had no dialogue with the lender, should generally be avoided. In this case the bank hasn't actually agreed to take a loss on the sale, and the owner just puts down any price in an attempt to get a contract to get the debt off his back. The lender may have a very different idea of what would be an acceptable selling price. When this happens, both sides get frustrated, and it is unusual for agreement to be reached.
This type of listing can make it look as though there are low priced bargains to be had, but it is no more than an illusion. The bank may not agree to take a lower offer, or even the asking price, so the contract just sits there in limbo with both buyer and seller thinking they have a contract while in reality they don't. So if you are considering making an offer on a short sale listing, make sure first that there is some indication in the listing that the bank is aware of what is going on.
The biggest problem with short sales of any type is likely to be the time that it takes to complete negotiations. It isn't unusual for a contract for a short sale to take three months or more to get even acceptance, let alone closing, so you may need to be very patient if you go this route. Occasionally a price-approved short sale can be much quicker to negotiate, in which case the wording of the listing will probably indicate this.