A “short sale” is basically a situation where a homeowner owes more to the Lender on their current mortgage than the house is worth. The owner cannot refinance and, due to circumstances, cannot afford to make the mortgage payment. As an alternative to losing the home to foreclosure, the homeowner negotiates with the Lender to accept substantially less on the mortgage than is currently owed.

For example, a homeowner owes $375,000 on a mortgage for a house that is worth maybe $325,000. The homeowner negotiates with the Lender to accept the lesser balance, the $325,000 minus any local closing costs and/or Realtor commissions. The Lender must agree to accept this lower balance.

Buyers think in the current market there are deals to be had in purchasing a “short sale” property. This may be the case, but the process to complete such a purchase can be daunting. First, the Buyer and Seller must come to a meeting of the minds on the purchase price. Second, a contract of sale is agreed to and signed by all parties. This contract is then forwarded to the Lender to encourage the Lender to agree to this amount as settlement of the outstanding mortgage debt on the property. The Lender must perform detailed due diligence to determine if the proposed amount from the contract will satisfy the Lender. This process is lengthy and includes detailed analysis of the current property values for the house in question. The Lender might perform an independent appraisal and may request opinions from local Realtors (called “Broker Price Opinions” or “BPO’s”) to arrive at a value for the home.

Where this gets difficult for potential Buyers is the process: this evaluation process on the part of the Lender can be lengthy, often stretching out for months on end. And, when all is said and done, the number acceptable to the Lender to settle the homeowner’s outstanding mortgage obligation might be substantially higher than the original agreed upon price in the contract of sale. Thus the potential Buyer might find they are being asked to pay more for the house, or, worse, may not qualify for mortgage financing for the higher purchase price. Meanwhile, the Buyer has committed substantial resources to the process of purchasing this home without the firm knowledge of a final price acceptable to the Lender. Those resources include the costs of mortgage applications, appraisal fees, attorneys’ fees, home inspection costs, and other costs incurred in the process of obtaining a mortgage commitment (which the purchaser must pursue with all speed and diligence according to the terms of the contract of sale). Market conditions may change, with interest rates rising or, worst of all, Underwriting conditions at Lenders drastically changing. In both instances, the potential Buyer may no longer qualify for mortgage financing even without the final price of the home changing through the Lender’s analysis process.

Beware when purchasing a home under short sale conditions. Ideally you’ll want to verify the short sale has already been approved by the Lender: you can get this in writing from the Lender through the homeowner’s attorney (usually the person negotiating the short sale in the first place). Absent such verification, you might find yourself being the “guinea pig” to test out the short sale price that ultimately will be acceptable to a Lender on any given home. If you like the idea of wasting your time and money on a potentially disastrous transaction that may never close under the terms you desire (that is, the “deal” you think you’re getting on this house!), then go on ahead and jump onto the short sale purchase bandwagon.

If you are a savvy Buyer, on the other hand, you’ll demand proof the short sale is approved (in writing) before you commit yourself to any such transaction. If you’re “smarter than the average bear” you might just go on out there and negotiate with a regular homeowner who’s not in trouble but truly wants to negotiate on price. There are plenty of regular homes out there that can be had at a great price: remember folks have things to do with their lives such as retiring or moving to larger (or smaller) homes and with the current market conditions, they may be very willing and eager to hear your offer even though it is substantially lower than the asking price. You won’t know unless you’re out there shopping and making offers.

In conclusion, be careful of the short sale phenomena. You might find you’re not getting such a deal after all is said and done. And with current market conditions there are plenty of homeowners who aren’t in trouble but have a stong need and desire to sell. They’re ready, willing and able to listen to your offering price and to negotiate with you. Now THAT’S the way to find a deal.