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Home > Real Estate Investment > The Shortcomings of Real Estate Short Sales

The Shortcomings of Real Estate Short Sales


A short sale occurs when the value of a home falls and the sellers are not able to receive a sufficient amount of money from the sale of the home in order to pay off the existing mortgage. In a short sale, the lender may agree to take less than the amount that is owed to them. While this may certainly seem as though the buyer is getting a good deal, this is not always the case. In some small cases, a short sale may prove to be profitable to buyers, there are some shortcomings of real estate short sales that you should definitely be on the lookout for.

One of the major drawbacks of choosing a home with a short sale is that the sellers likely paid too much for the home in the first place. It could also mean that the homeowner borrowed too much money. This tended to happen in markets that were rapidly appreciating, resulting in the buyer becoming over-mortgaged. This means that the balance of the loan would exceed the value of the home. This could prove to be problematic for you.

Also, it is entirely possible that while the home is listed as a short sale it may not actually be eligible for a short sale. In some cases, real estate agents that are either inexperienced or simply unethical steer sellers toward a short sale when they do not actually qualify for a short sale. In order to be approved for a short sale, the homeowners must demonstrate that they have a hardship and must also submit evidence of that hardship to their lender and be approved. Unfortunately, in some instances, homes have been listed as short sales without the homeowners actually going through that process or even talking to their lenders about a possible short sale. If you place an offer on a home with a short sale and it turns out that the home doesn't qualify the deal could fall apart.

Also, you could find yourself in a situation whether the lender chooses to hold out for a price that is higher. Lenders are usually perfectly well aware of the value of the property. In fact, they may oftentimes insist on having a comparative market analysis performed. If the lender determines that they would be able to get a better price by taking the property back through foreclosure than what they would be able to obtain through a short-sale offer, then they may very well attempt to do that.

Another problem that you may run into is the home that is being sold 'as is.' Many mortgage companies that actually agree to a short sale may require the home to be purchased in its current condition. They may refuse to pay for the following:

  • Pest inspections or work that is necessary to clear a pest report

  • Home protection plans

  • Roof certifications

  • Repairs that are suggested from a home inspection

  • Deferred maintenance

The length of time to close can also be problematic in some cases with short sales. The back log of foreclosures from the bank as well as the amount of paperwork required for the seller to submit can oftentimes delay the transaction closure date. This could mean a delay of weeks or even months in order to get a response to the purchase offer from the lender. Also, in some cases, there could even be two lenders involved if there were multiple loans attached to the property. This typically means that it could take even longer.

The lender could also change the conditions of the short sale; even at the last minute. In the event that the market should change or some new information should become available, the lender may very well attempt to change the terms of the purchase contract. At the very least, this can be quite annoying and time consuming.

If you are working with a buyer's agent and you have agreed to pay a certain buyer's commission, you may also find yourself liable for a larger portion than expected. This is often due to the fact that many lenders do not pay traditional commissions to agents; they often want a discount. Due to the fact that the agents working a short sale often end up doing more work, they typically do not appreciate a cut in their pay. As a result, you may end up paying more money if your agent won't waive the difference.

Finally, you may face higher than expected closing costs due to the fact that the lenders may not be willing to pay for some of the fees that the seller would ordinarily cover.

Keep in mind that while a real estate short sale may certainly seem attractive, in the end you may face more costs than you bargained for.


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