Need A Home? Consider A Short Sale

Buyers on the hunt for a home may have seen listings with the term "short sale" in bold letters. Short sale situations can be fine for some buyers as long as they understand the meaning and the precautions to take. To find out those things for yourself, read on.

What is Meant by Short Sale?

The word short is directly related to the value of the home given the mortgage. When you have an existing mortgage, it must be paid off before the home can change hands. In most cases, that happens when the buyer arranges for financing and a check from their lender is presented to the seller's lender at closing time. If the sales price of the home is less than what is owed, a shortfall exists.

Appraisals and Short Sales

The sales price is almost always based on the value of the home. In many cases, the sales price exceeds the value of the home when the market is competitive and prices soar. That is not always the case, however. When a home is worth less than the existing mortgage, the home may be sold through a short sale situation.

Home appraisals are based on several factors, such as:

  • Square footage.
  • Number of rooms.
  • Lot size.
  • Neighborhood.
  • Features.

A lender will require an appraisal before they extend the new buyers a home loan, and the home must appraise for at or above the agreed-upon sales price.

Why Is the Appraisal Lower Than the Existing Loan?

Numerous issues can be in play when a short sale situation happens:

  1. The original home appraisal was too high. It might not be as nefarious as collusion between lender and appraiser, but homes get appraised at inflated rates all the time. It could simply be an incompetent appraiser at work.
  2. A second mortgage or home equity line of credit must be paid off.
  3. The original home appraisal was accurate at the time, but the home or neighborhood is now in decline and the value of homes has decreased. This is one reason why homes in less-than-stellar settings may not always be a good bargain.

How to Deal With Short Sales

In some cases, the lender is willing to take less to settle the loan as the alternative might be foreclosure. In other cases, either the buyer or the seller has to present cash at the closing table to pay off the existing loan. Be prepared for short sales to take longer to close and for some additional paperwork and appraisal costs. Also, expect the home to be in poorer condition in some cases. To find out more about short sales or homes for sale, speak to a real estate agent.