A short sale is an alternative to foreclosure for the property owner who cannot continue to make payments and is unable to sell through an ordinary sale method because the current market value is less than what will be owed by this seller at closing of the property.  Not all banks will cooperate with short sales even though it is frequently in the best interest of both parties to terminate the relationship in this manner.

Banks that will consider short sales will not entertain the possibility for a specific property until there is an actual, preapproved, non-contingent buyer who has signed a purchase offer for the property subject to approval of the short sale by the bank. The short sale approval process always involves an appraisal of the property to determine current value.  In many cases, it makes more sense for the bank to take less than what is owed because they can then avoid a costly foreclosure proceeding that will include attorney fees, current and back taxes, water and sewer bills and as well as the certain debilitation of the property resulting in an even lower value for the bank on resale.

Short sales can be a good buying opportunity as long as you keep a couple of things in mind. First, it is imperative that you put a time limit in your purchase offer. It needs to clearly state that your offer is subject to approval of the short sale NO LATER THAN and then insert a date. A month is a reasonable time period. If you don’t put a cut it off date like this, you are potentially on the hook for the property indefinitely. One thing I’ve learned in the school of the hard knocks is that institutions tend towards taking as much time as you give them so if it’s indefinite, there is no urgency. The short sale department will deal with the transactions that have deadlines first.

The second thing I would encourage you to do if you are trying to be buy a property through a short sale process is to be very stingy about your deposit amount.  In the financial jungle, whoever holds the money wins.  The seller or the seller’s realtor or attorney is governed by specific escrow laws, however, once your money is tied up, it’s tied up and strange things can happen with deals that are out of the main stream such as this. Bottom line you don’t want to chunk down a few thousand for a “what if” deal such as this. Do your best to get away with only risking a couple hundred dollars as your earnest money.

Lastly, you will need to get your home inspection up front in most cases.  Banks usually will not entertain an offer that is subjective to a home inspection. You will be risking the fee to the inspector in this case without knowing if you will really get the house or not, but it is absolute must to have the property looked at by a professional.

For more information about these types of deals, you can contact me at michael@olear.com