Buying a short sale can allow you to get a pretty good deal on a property that is selling under somewhat distressed conditions. The seller wants out of the property, often to avoid foreclosure, and the property is selling at a price that will net the lender less than what is owed them. However, before you go down this road you need to decide if you can handle the concept of a short sale. Not everyone can.
First, you need to understand the strange dynamics at work in a short sale. The seller still owns the property and is still the seller. However, the lender is really the one in the driver’s seat since they have to approve a deal that will result in them accepting less than a full payoff. The result is that the lender can’t do anything without the seller’s permission and the seller can’t do anything without the lender’s permission. And the lender may have all sorts of very particular rules about what they will and will not permit in a short sale. For example, they don’t want the seller getting a single dime out of the transaction because if there was a dime to be had it should rightfully be theirs since they are the ones getting short changed. And, as you might expect, this is bureaucracy at its worst. You are often dealing with some low level administrative type who gets yelled at all day and is suffering from a false sense of importance. They give meaning to their life by saying “no” and there is no master list of stuff that they say “no” to. In fact, that’s what makes life so much fun for the low level bureaucrat. They get to surprise you with their “no” when you cross the line. Present a request to them with the wrong packaging and “NO!”. For instance, you might get a bank to give you a credit for an unforeseen repair or you might get them to approve a lower price but they might balk at giving you a credit for lost rent or a proration of rent for the current month. Therefore, if you want one thing you might need to call it another thing. When you are dealing with a short sale you are not in a rational world. The bureaucrat will gladly lose $100,000 to foreclosure rather than pass up the opportunity to exercise their pathetic authority.
It gets even more complicated as you consider the seller’s position in a short sale. You need to understand a basic concept: As the buyer in a short sale you are NOT doing the seller a huge favor. If anything, the seller may be doing you a favor. First, you are dealing with someone who is financially on the ropes. Odds are they have no money. They may be considering other alternatives to a short sale such as deed in lieu of foreclosure, letting it go to foreclosure, or even personal bankruptcy. If the property is not their primary residence, the amount of money the bank is going to lose on the deal becomes taxable income to the them (the seller). So, the seller may not care one way or the other. They may have moved into their mother’s basement or just checked out of the process, waiting for the worst roller coaster ride of their lives to end. They may not be getting their mail or returning anyone’s phone calls. So you are not going to get any money from the seller, they are not going to fix any problems, and there is no point in having your uncle, who is an attorney but not a real estate attorney, badger them with official looking correspondence that make demands on them.
Here is the bottom line. When you buy a short sale, you are shopping in the bargain bin. This is a closeout. Irregulars. Merchandise sold as is (for the most part). No returns.
Can you handle that? If so, you might pick up a great bargain.