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Short Sale Buying Advice

Conventional Wisdom: be wary of short sales

Many buyers think they will get the best deals by rescuing underwater borrowers through a short sale. In a short sale, a home is sold for less than what’s owed on the mortgage. In order for the short sale to go through, the lender holding the mortgage has to agree to the accept a price that is less than the seller owes on the property. Many lenders are, understandably, reluctant to do so.

Obtaining the existing lender’s approval adds another layer of complexity to an already complicated transaction. In some cases, such deals can take months to approve.

Unless the existing lender has pre-approved a short-sale price then you might want to skip short sales entirely. Falling in love with a home and then finding out six months later that the bank won’t accept the seller’s shortfall, might be a place you choose not to be.

Foreclosures that are owned by lenders are another story. Lenders who have seized a property through foreclosure are often more realistic about the value, and may have even done some repairs on the house prior to listing it.

Look for what the real estate industry calls “battered histories”

That usually means one of three things:

  • the home has been on the market for 90 days or more,
  • the seller has cut the price numerous times, or ,
  • the home has had other offers that have fallen out of escrow.

Any of those factors could mean that the seller is getting anxious to sell, and may be more willing to negotiate. However, be aware that doesn’t mean that a ‘low-ball’ offer will work.

The homeowner may already feel rather battered by his sale process, so you don’t want to insult him. That will get you nowhere… the seller may not even counter back because he would prefer to sell his home to someone else. If the house is fairly market priced, don’t make an offer that’s more than 10% below the asking price.

Interest rates are as important to the cost of a purchase as is the price

You might think you can snag a great deal by waiting — hoping that the owner of a $500,000 listing will get desperate enough to accept $450,000. But if interest rates rise 1% during the time you wait, you’ll probably end up paying more.

It is estimated that if you finance $400,000 of the purchase price of that home, the 1-percentage-point difference between a 5% mortgage and a 6% mortgage will cost you more than $90,000 over the life of a 30-year loan.