Realtors sometimes steer buyers away from buying houses that are “short sales” and some home buyers have horror stories about their experiences trying to buy a house in a short sale. Nevertheless, well-informed and well-represented buyers can get some great bargains in the short sale market.

First, what is a short sale? When a seller owes more on their mortgage than they can reasonably expect to net from the sale of their home (after commissions and closing costs), and the seller does not have sufficient assets to make up the difference, the bank has to agree to accept less than it is owed in order for the property to be sold. The bank will be ‘short’ on what’s owed them, making it a ‘short sale’. This adds another party to the purchasing process which can make it more time-consuming, complicated and uncertain.

You may wonder why a lender would agree to accept less than they are owed. Generally, it is because in most situations the lender expects that it will lose less money in a short sale than it will if the owner can’t sell the house, can’t afford to keep up the mortgage payments, and the property goes into foreclosure. Many lenders have become more efficient and reasonable in the way they respond to short sales, but these real estate transactions are still more challenging than ‘regular’ real estate transactions.

Buyers who are the best candidates to purchase a short sale are those who: (1) do not need to make their offer contingent on sale of their current home; (2) are able to wait an unknown length of time to learn whether the lender has approved their offer, (3) are paying cash or financing through a conventional mortgage, (4) will be able to close within a few weeks, once the offer is accepted; and (5) have a fairly high tolerance for uncertainty and bureaucratic red tape.

When considering whether or not to put in an offer on a particular house that is listed as a short sale, the process can be relatively less complicated if (a) the difference between what the seller owes the bank and the market price of the house is relatively small (the buyer’s agent should be able to estimate this) and (b) if the seller’s agent and attorney have already begun the process of getting the bank to agree in principle to a short sale. The bank will still have to approve the particular offer or choose among multiple offers, if that is what happens, but at least the buyer and seller are less likely to have to wait months (as was the norm until recently) even to learn whether or not they can proceed with the sale.

Before you jump into the short sale market, there are some things you can do to prepare. (1) Contact a good real estate attorney who is experienced in short sales and who can handle your closing; contact me for recommendations if you like. (2) If you will be financing your purchase, get a professional mortgage pre-approval and talk to the lender ahead of time about how fast you will be able to get a mortgage commitment, once you have found the home you want to purchase. This is a situation where working with a mortgage planner face-to-face is better than trying to finance your purchase on line; you, your realtor, your mortgage person and your closing attorney need to be able to work as a real team on your behalf. (3) If you will purchase with cash, talk to your bank about their process for issuing a ‘proof of funds’; you will need this to get your offer approved.

Armed with this perspective and preparation, if the house you fall in love with is a short sale, go ahead and make your offer! We'll wait it out together and celebrate when if finally goes through!