4 Disadvantages to Buying a Short Sale
If you are in the market to buy a home you may be considering the option of looking at distressed properties. By now we’ve all heard that today’s market conditions favor buyers, and those buyers can find some really fantastic deals due to all the short sales and foreclosures on market. So let’s take a closer look, specifically at short sales.
Unlike foreclosed homes, properties that are listed as “short sales” are still owned by a person, not a bank. The term short sale simply means that a homeowner needs their lender to accept less money than what is owed on the property. In other words, if a homeowner owes their lender $250,000 but the market value for their home is only $175,000, the owner must either pay the shortage themselves or get their lender to write-off the difference when the property is sold.
While short sales have an immediate attraction because of some very low advertised prices, there are some things to be aware of when considering a purchase of a short sale:
1. Misleading Prices
Many times the price that is advertised on a short sale listing is NOT a bank approved sale price. That means there is no guarantee that the home for sale can even be sold for the advertised price; it’s probably just wishful thinking in many cases. That advertised price is designed to get foot traffic through the door and nothing more.
2. Length of Transaction
Short sales are lengthy and they require an overabundance of patience from the buyer. Once an offer is submitted on a short sale, it typically takes 1-2 months to get a response from a lender, but it can take up to 9 months or even longer to get a response. During this waiting period, buyers can lose low interest rates and other tax credits. If a buyer gets preapproved for their own loan and locks into a low interest rate, that rate is only guaranteed to them for 60-90 days which most likely will not be long enough to close on the transaction. And worse yet, just imagine waiting all that time and getting a “no” from the bank. You’re back at square one and you have nothing to show for all that time wasted.
3. Home is Sold “As Is”
If a seller has made the decision to short sale their property they will not be invested in making any repairs. And lenders routinely ask buyers to purchase a home in its current condition. There are many things lenders will refuse to pay for when a home sells, but here are three areas that can lead to significant additional costs for the buyer:
a) Home inspections and any necessary repairs revealed as a result
b) Pest inspections and the removal if any pest problems
c) Roof inspections and any necessary roof repairs
4. Imagined “Instant Equity”
Many people think that if they can purchase a home in short sale status, they will instantly gain a large amount of equity, but more times than not, it’s just not true. In reality, it’s just the seller losing equity. For example, if a home sold for $300,000 a couple of years ago and it’s now listed at $200,000, that doesn't mean the buyer is gaining $100,000 of equity overnight. It just means the previous owner paid too much money during a rising market and now that the market has dropped, they are left with no equity.