Another type of distressed sale is the "Short Sale."  These Cincinnati homes are still legally owned by the home owner.  The amount that the seller owes on the mortgage and the selling costs exceed the amount that a buyer will pay for the property (fair market value).

So what happens in a Short Sale?

The seller has two options.  One, they could personally come up with the difference between what is owed and what it can sell for from their savings or retirement accounts or by borrowing the money. Or second, they may negotiate with their lender to accept a payoff that is "short" of what is owed.

A short sale differs from a typical sale, because the buyer first negotiates with the seller, but than the seller must negotiate with the lender to get them to forgive the difference and write that loss off on their books.  The seller submits extensive financial information to prove that they qualify for this kind of relief.

Here's where the problems come with short sales...they usually take an extraordinary amount to time to close.  Lenders may take weeks or even months (we have seen over a year) to make a decision.

What are the Advantages to Purchasing Short Sales?

  • Sometimes you will be able to purchase the home below fair market value. That assumes that the bank feels it is to their advantage to accept less than to go to foreclosure, a very expensive process.  Personnel in a bank strictly make business decisions. 
  • Because the Seller is occupying the property, they tend to need fewer repairs.
  • Buyers who are willing to put up with this long approval process will have less competition, since most buyers do not have that much patience.

What are the Possible Disadvantages to Purchasing a Short Sale?

  • Usually the seller has no money to do any repairs and the lender will not do any either.
  • Banks will rarely pay any of the Buyer's closing costs.
  • Short sales take a long time to close and sometimes even longer to be accepted (or rejected).  Strangely, the banks often demand a quick close after taking months to accept the offer.
  • Buyers waiting for an accepted offer could lose out on low interest rates.  Your lender will usually only lock in an interest rate for 60-90 days and charge a premium to do that length of time. Sometimes you have paid a fee to lock in a good rate and by the time it expires, you still don't have an answer and have lost that money.
  • If your lender fails to perform on time, the seller's lender may back out of the deal.
  • You lose time and other potential homes while waiting for the lender's answer.

We recommend that you never stop looking, if you have written an offer on a short sale.  If a better property comes along, you may be able to get it. Since you don't really have a contract on a short sale until the bank has accepted the contract, you could then rescind the offer on the short sale house.

Again, keep in mind the ramifications if you also intend to take advantage of the government sponsored tax credits.  You have from now until April 30th to be under contract and must close by June 30, 2010.  Waiting for a short sale means you may risk the $8000 or $6500 you could be entitled to receive.