For those looking to pick up a bargain in the current housing market, a short sale may be appealing. But while a short sale can offer significant savings to a savvy and patient homebuyer, it can also be a frustrating and potentially hazardous experience for the unwary.

On the surface, a short sale is a classic win-win-win situation. A distressed homeowner gets to avoid foreclosure by selling the property before it reverts to the bank. The bank gets to avoid the costs and hassles of foreclosure while reselling the property at a fair price. And the buyer gets a property for below market rates.

In reality, a short sale can be a long, difficult process. The distressed homeowner can't sell unless the lender holding the mortgage agrees. The lender may prefer to hold the homeowner to the terms of the mortgage and take its chances on an eventual foreclosure. And the buyer may end up going through a lot of grief in return for paying about the same as he would have through the simpler and more straightforward process of a foreclosure sale.

Requirements for a short sale

A short sale occurs when a bank agrees to sell a distressed property for less than the balance owed on the mortgage in order to avoid further losses through the foreclosure process. The current homeowner may be in default or simply facing circumstances that make the eventual loss of the home inevitable, such as becoming unemployed.

The key is that the homeowner must owe more than the property is worth - a common situation in the current declining housing market - because otherwise, he or she could simply sell the property and pay off the lender.

The first thing you're going to need if you're thinking about buying a short sale is a buyer's agent experienced in the short sales - one who's done at least 2-3 such sales before, preferably more. You buyer's agent is going to play a key role in helping you determine what to offer and in negotiating with the bank - which is going to try to recover as much of its money as possible - so having a good buyer's agent is critical.

Expect 2-4 months to complete

You also have to be willing to invest a fair amount of time - short sales take considerably longer to complete than a regular transaction, often two to four months, depending on the lender. To help the process move along, you need to make sure that both you and the current homeowner have all the proper documentation lined up and submitted to the lender. For you, that means having your financing lined up; for the seller, it means documenting the hardship that necessitates a short sale and anything else the lender may require.

To find properties being offered for short sales, check your local MLS listings, same as you would for any other property. Although it's uncommon for properties to be listed outright as short sales - listing agents believe the term encourages buyers to submit lowball bids - there are a variety of other phrases that commonly indicate a property is being offered as a short sale, including "subject to bank approval," "preforeclosure," "notice of default," or any reference to bank involvement.

You also have to find which lender holds the mortgage on the property and how many liens there are. Since mortgages are commonly packaged and resold, you could end up wasting time dealing with a lender who no longer holds the mortgage. Your buyer's agent can help you with this. Similarly, you'll probably want to avoid properties that have second or third liens on them, since that means additional lenders you'll need to negotiate with - for most people, negotiating with one is difficult enough.

Negotiating price can be a challenge

Once you find a property you like, you need to make an offer, which can be tricky. The list price may not be anything close to what the bank will accept - the listing agent may list an unrealistically low price in order to draw attention. Remember, in a short sale, it doesn't matter what price the homeowner will accept - it's the bank that has final say, since the bank is taking a loss. The homeowner is just trying to avoid further debt and the serious damage to his or her credit rating that would result from a foreclosure.

Many experts suggest offering about 10 percent less than comparable properties in the area, regardless of the listing price. Even then, expect that the bank will likely come back with a counteroffer. The price you eventually obtain will depend in large part on the number of other distressed properties on the market and how eager the bank is to dispose of them.

Some banks may be more motivated to deal

A larger number of distressed properties will normally mean you can press a harder bargain, although these days, some banks may be so overwhelmed they may prefer to simply let them go to foreclosure rather than deal with the short sale process.

On the other hand, a lender that is looking to clear its books may be more willing to deal. Short-sale properties are sold "as-is," meaning the bank isn't going to chip in for repairs or provide other guarantees. That means you're going to have to pay for your own home inspections, title searches and other costs associated with closing.

As much as possible, try to make acceptance of the final offer contingent on clearing these checks - otherwise, you might end up paying for them only to see the sale fall through before closing - possibly because the bank got a better offer at the last minute.

As the above illustrates, short sales are not for the faint-hearted. However, if you're patient and do your homework, there are some gems to be found out there to pay off your investment of time and energy.

Published on March 25, 2011