The tumultuous events that hit the housing market beginning in 2007 have left many homes “underwater” — they are now worth less than their mortgage balances. This has created a buyers’ market for homes, including ones that are in foreclosure or up for short sale. You can save money on a short sale, but you must be sure to factor in all your costs.
What is a short sale?
When a home lists as a short sale, the lender agrees to forgive part of the seller’s mortgage balance to facilitate the purchase of the home at a reduced price. The seller usually receives no part of the purchase price, although many banks now offer substantial relocation reimbursements to willing sellers. Short sellers avoid foreclosure and serious damage to their credit ratings. For a short sale to succeed, the buyer, seller and the lender must agree on the purchase price. Fitch Ratings reports that short sales made up 51 percent of bank mortgage loan modifications as of November 2012.
How much will I save?
According to RealtyTrac, the nationwide average discount for short sale properties was 23 percent in the last quarter of 2012. This compares to a 39 percent discount on foreclosed properties. The numbers vary substantially from city to city. The price a bank will accept usually depends on a broker price opinion, or BPO, which functions much like an appraisal. You can make a bid below the BPO price, but if you are too aggressive, the bank might wait for other bidders.
How much will I spend?
Financial advisor Frank Poschinger — an MBA and owner of a financial consulting practice in Louisville, KY — points out that you must factor in the costs of repairs and renovation. “You will usually save some money if you buy a short sale house. But you must do your homework to ensure you are truly getting a bargain, by knowing the true market value of the house, and the dollars you will be spending on the usually needed repairs.”
Indeed, you might need to spend a substantial chunk of money on fixing up a short sale property. However, you would probably have to spend a good deal more on repairing a foreclosed property, since these are typically empty before sale. The advantage of a short sale over a foreclosure is that the seller usually occupies the home until the sale is complete and thus the home might remain in better shape.
What should I look out for?
In years past, short sales developed a reputation for taking a long time. However, in 2012, the U.S. government’s Home Affordable Foreclosure Alternatives (HAFA) Program created new rules and incentives to speed decisions regarding short sales, often yielding results in as little as 10 days. Short sales have become so popular that you might expect competitive bids, which will tend to cut the savings you might achieve. Another factor to consider is that, besides costing less, foreclosed properties let you buy directly from the lender and avoid dealing with homeowners, who occasionally might be troublesome.
As the housing market slowly recovers, you will probably see the overhang of unsold houses continue to decrease and the general price level of all housing, including short-sale units, rise. A real estate agent specializing in short sales can prove to be a valuable ally as you evaluate homes in the community of your choice.