our everyday life

What Is the Downside of Buying a House Through a Short Sale?

by Beverly Bird

When you buy a short sale property, you're dealing with a homeowner who is no longer able to make his mortgage payments, so he's negotiated with his lender to sell the property for less than what he owes. Unfortunately, you're not actually dealing with the homeowner when you buy a short sale -- and he's the one the most eager to sell. The final authority in the transaction is the lender, and this can create a few downsides.

Condition

Short sale properties are sometimes in better condition than foreclosures because the homeowner wants the sale to go through -- he's likely to maintain the home to the best of his ability. However, you're dealing with someone going through hard economic times, so he may not have the available cash to keep up with major repairs. When you purchase a short sale, you take the property "as is." The lender is not going to sink more money into the home to fix a leaky roof, and the homeowner probably can't afford to. The cost of repairs fall to you, so may have to invest more money to make the home habitable. If you find out after you make an offer that the repairs will be really significant, you can pull the plug on the deal, but depending on the terms of the contract and when you walk, you may lose whatever money you've invested in the transaction so far.

Lender Approval

Short sales can't happen unless the lender accepts your offer – the homeowner doesn't have a say in the matter. Even if you make a market-value bid, short sales must typically go through a lengthy approval process involving many steps. The lender probably won't accept your offer immediately -- or take the house off the market. Meanwhile, other buyers might offer more than you did. If the lender accepts a better offer instead – and it can – you're out of a deal. Lenders sometimes accept your offer and then cancel later -- and if you've spent any money on legal fees or home inspections, you may not be able to recoup these losses.

Secondary Liens

If a home has more than one lien against it, your purchase requires not only the approval of the first mortgage lender, but of all junior lien holders as well. They probably won't agree to the deal if there's nothing in it for them because the first mortgage holder is taking all the proceeds from the sale. If any junior lien holder nixes your offer, the deal can't go through, even if the first priority lender accepts it.

Time Considerations

Short sales take a long time, at least compared to other real estate purchases. In some cases, the whole transaction can take six months or more, and a lot can happen in six months. Not only can the lender pull the plug on your deal, but the interest rate you received on a loan commitment may no longer be viable. The terms of the mortgage you think you qualified for could change. You'll need financing lined up in advance of a short sale because after the lender officially approves your deal, you may have minimal time to close on the property.

Closing Costs

In most cases, a short sale homeowner is not going to be able to pay his portion of the closing costs. There's no equity in the home and if he had available reserves of cash, the short sale wouldn't have happened in the first place. The lender is not likely to volunteer payment of these costs on the homeowner's behalf, so they'll typically fall to you.

Photo Credits

  • Jupiterimages/liquidlibrary/Getty Images