A short sale, where a home sells for less than the mortgage balance, typically involves a long, uncertain approval process lasting months, as lenders must approve the deal. For buyers, the home is usually sold "as-is" with no repairs, while sellers face credit damage and potential tax liability on forgiven debt.
Short Sale: Issues for the Buyer
There are potential risks of buying a short-sale property. For example, it can be more time-consuming than a traditional sale. There could be a heightened risk of needed home repairs and renovations, as well as liens or property claims.
DRAWBACKS OF SHORT SALES
No guaranteed closing date. Lender will probably not approve the contract unless it provides for an “as is” sale. Lender will not pay for inspections, repairs, or warranties and often will not pay for standard seller closing costs such as revenue stamps and recording the deed.
In a short sale, the lender typically pays most of the seller's closing costs, including agent commissions, title fees, and taxes, because they are accepting a loss to avoid foreclosure. The buyer is responsible for their own closing costs, but negotiations are key, as the lender must approve all expenses, and sometimes the buyer may negotiate for the lender to cover some costs to get the deal done.
The homeowner in a short sale is simply wanting to walk away from their current mortgage and avoid foreclosure. They will receive no proceeds from the sale and, therefore, are not too interested in negotiating any financial terms of the transaction.
If you're purchasing a short sale, your goal should be to make an offer that reflects the realistic value of the property while also considering any necessary repairs. A fair offer that aligns with market value—supported by a strong preapproval letter—goes a long way.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
Short selling means selling stocks you've borrowed, aiming to buy them back later for less money. Traders often look to short selling as a means of profiting on short-term declines in shares. The big risk of short selling is that you guess wrong and the stock rises, causing unlimited losses.
Key Takeaways:
In a short sale, your lender—not you—typically pays the realtor commissions from the proceeds of the sale. Commission rates in short sales are often 4-5%, slightly less than the traditional 5-6% in a regular sale. The lender must approve the final commission rate.
The "7% rule" in real estate typically refers to a quick screening tool where an investor checks if a rental property's gross annual rent is at least 7% of its purchase price, indicating a potentially solid income investment, though it's not a substitute for detailed analysis; however, other "7 rules" exist, like those focusing on agent performance (top 7% of agents do most business) or key investment principles (due diligence, diversification, market awareness, clear strategy) for long-term success.
Red flags when buying a house include structural issues (foundation cracks, sloping floors), water problems (stains, musty smells, basement flooding signs, poor drainage), sloppy renovations (fresh paint covering damage, crooked finishes, DIY work), bad maintenance (old roof, deferred upkeep), and listing/market oddities (long time on market, multiple price drops, little info). Always get a professional inspection to uncover hidden issues with major systems like electrical, plumbing, HVAC, and roofing before buying.
In a short sale, the lender typically pays most of the seller's closing costs, including agent commissions, title fees, and taxes, because they are accepting a loss to avoid foreclosure. The buyer is responsible for their own closing costs, but negotiations are key, as the lender must approve all expenses, and sometimes the buyer may negotiate for the lender to cover some costs to get the deal done.
Purchasing a home through short sale can offer advantages such as a lower price point and less competition. Short sale purchases can come with additional risks such as a more complicated negotiation process and the home being sold as-is.
The agent represents the seller, not the lender. In a short sale, the offer is negotiated with the seller, just as in a traditional sale. The offer is then submitted to the lender, not for an “acceptance” but for approval of the terms and net proceeds.
Sellers typically pay more in total closing costs, often 6% to 10% of the sale price, largely due to real estate agent commissions, while buyers usually pay 2% to 5% for lender fees, title insurance, and other costs, but these amounts are negotiable and vary by location and market. The seller covers the large commission for both agents, while the buyer pays for their mortgage-related expenses, but buyers can ask sellers for "concessions" to help cover their costs.
For a $250,000 home, closing costs typically range from $5,000 to $12,500 (2% to 5%), covering lender fees, title insurance, appraisal, taxes, and prepaid items, though costs vary by location, loan type, and lender, with estimates provided in a Loan Estimate from your lender.