With Mr. Wetzel and our shoestring budget, I looked at a lot of houses that other people may not have considered. We toured vacant, run-down houses. We visited foreclosed houses and bank-owned houses, and the house we ended up buying was a short sale.
What is a short sale?
Sometimes a homeowner needs to sell his home, but he can’t sell it for enough to pay the bank back for his mortgage. Some reasons why this can happen are: the house was recently purchased; the seller borrowed against the value of the house or took a second mortgage; or the market dipped considerably since the seller purchased the house, reducing the overall value of the house. Given the recent economic climate at its trauma on the housing industry, there are a lot of short sales out there.
What does this mean for the seller?
In order for the seller to sell their house, they need the bank to approve the purchase price. The seller has a lot of paperwork and hoops to jump through. The bank is agreeing to lose money on this sale, since the house’s new price won’t cover the seller’s mortgage amount.
What does this mean for the buyer?
For a typical sale that has no major complications, when a buyer puts in an offer on a house, it is accepted by the seller, and then any contingencies (like a house inspection) are worked out in 2 weeks or less. After that, the sale’s closing date depends mostly on how quickly the Escrow and Title companies can finish up their paperwork. It is common for a sale to close a month after the initial mutual acceptance has been reached with the seller, and I have seen sales close even sooner.
When you are buying a short sale, the process takes longer. A lot longer. After the seller accepted the offer, we waited for the seller’s bank to accept it as well. 3 months later, we heard back that we were a go to proceed with the rest of the process. Overall it took about 4 months until we were able to move into our new house.
What are potential drawbacks?
- If you are in a rush to move, don’t buy a short sale.
- If the house is vacant, that means it will be vacant the entire time the bank is making up their mind about your offer. Unless it is receiving regular maintainable, the house will likely be in worse condition when you move in. Also, depending on your area, vagrants could be a concern. (Thankfully, our seller kept up with maintenance, so the house was in the same condition when we bought it as when we first toured it.)
- While you are under contract to buy a short sale, you may not be able to put in an offer on another house. Ask your real estate attorney or agent for advice on this point.
Why would you want to purchase a short sale?
If you have the patience to wait for the bank, you can often get a great deal on a property. Banks tend to accept the offers that their sellers accept, or they at least counter with a reasonable offer given the market conditions and condition of the house. We got everything we asked for. Plus, we had an extra 3 months to save up and plan for the updates we wanted to do once we moved in.
Perhaps most invaluable, we had 3 extra months to get used to the idea of buying our first house (that is to say: we freaked out, we asked ourselves, “Do we really want to buy a house? Do we really want to buy this house?” …and then we had the time to conclude the answer was a definite yes). Being able to walk into the escrow office and sign the final papers confidently, without a doubt that we were making the right decision, helped us to enjoy our new home and not let the overwhelming work and repairs ahead of us change our decision: this was the house for us.
A short sale is complicated, but buying one can help you come out on top.
By ekwetzel
2010-10-25
*The pictures in this blog post are of a vacant short sale property that Mr. Wetzel and I were considering buying. This is not the house we ended up with.
Great post, Erin! Thanks for putting it in layman’s terms!