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Home Buying Success: What You Need to Know About Short-Sales

By Sheryl Landrum
Home Worth Columnist

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The real estate buzzword today for home buying and home selling is "short sale." Selling a home with a short sale means the lender has agreed to allow a sale for less than the balance of the mortgage(s) against the property. Does this mean that home buyers are getting a good deal? Here's what you need to know about short sales.

Home Buying Basics: Learn How Lenders Treat a Short Sale
Lenders who have agreed to a short sale are making a determination that it is less costly for them to sell the home at a loss than it is to initiate foreclosure procedures. However, this does not mean that lenders will bend over backwards to help home buyers complete the purchase. Buying a house through a short sale can take patience and may not be the home buyer's best bet. Why?

  • Home Value--just because the house is selling for less than is owed on it does not automatically make it a good deal. The home sellers may have initially paid too much for the house and may have borrowed too much against it. The lender will require a CMA (comparative market analysis) or appraisal to determine the value of the home; if the lender thinks it can make more money by foreclosing it may do so or wait for a higher selling price.
  • Home As Is--the hard fact is that short sales are generally not in prime condition and the lender on a short sale is not going to invest more money in a house it is already losing money on. Also, homeowners losing their home in a short-sale have no real motivation to have the house sell. They leave the home with no monetary value and emotionally they have probably already moved on.
  • Closing Costs--Many lenders will not absorb the cost of items that home sellers generally pay for. Roof and home inspections, pest control, and home warranty plans are generally paid for by a home seller, but most lenders just won't go there.
  • Closing Escrow--the length of time to close escrow is generally much longer on a short sale as a legal process is involved. Also, if there is more than one lender, for example if the seller has a first and second mortgage, both lenders will have to agree to the short sale.
  • More Work and Less Income--your real estate professional generally suffers with a short sale as well. Lenders often ask a real estate agent to discount his or her commission while generating two or three times the paperwork to close the deal. Finding a real estate agent with experience in short sales is recommended.

It is obvious that short-sales come with baggage that home buyers need to be aware of. However there is money out there to be made on the right deal--and now that you know some of the pitfalls with a short sale, you can search out a transaction that will work well for you.

About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage of San Diego at the Prudential Realty Office in Bonsall, California.
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