Short sales hold significant advantages for everyone involved. A seller can get out from beneath an underwater mortgage when the balance he owes is more than the home's appraised value. There's also an advantage for the lender. The mortgage company doesn't have to go through the foreclosure process. There are also some perks involved for buyers of short sale properties.
Buying at Fair Market Value
The homeowner doesn't have the final authority to agree to a short sale. His mortgage lender must agree to accept fair market value for the home, rather than the mortgage balance due. The lender will typically have the home appraised, then compare the appraised value to the buyer's offer. If it's close, the lender may approve the sale rather than foreclose, or it may counteroffer for a bit more. Even if the lender counteroffers, however, the buyer can typically purchase the home for close to what it's worth, whereas he'd be paying too much if he had to cover the owner's mortgage. Buyers can usually get good deals when they purchase a short sale home.
Locking in Sales Price
Short sales can take considerable time while the buyer waits for lender approval. However, a buyer can lock in the sales price when he makes an offer on the home. If the real estate market begins to rebound while he's waiting for lender approval, he can still purchase the home for its appraised value at the time he made the offer. This can result in owning a property the buyer can then resell later for a profit if the market continues to improve.
If a buyer has good credit, he may not have to shop for a mortgage. The seller's lender may finance the mortgage itself to streamline the sale. Closing can occur relatively quickly, because the lender typically already has all the buyer's financial information. Additionally, the lender might offer attractive financing to seal the deal, so it can continue collecting mortgage payments for the property without much of a lapse.
There are some downsides to buying a short sale home as well. Short sales don't happen just because the seller wants to get out of the home and move on. The homeowner must be in a financial crisis and unable to make the mortgage payments, or the lender wouldn't approve a short sale transaction. If the seller is in financial distress, it's not likely he's spent a lot of money to keep the home in good repair -- particularly if he knows he'll be leaving it, either through a short sale or foreclosure. A buyer might end up spending a good deal of money to make the home presentable and safe again.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.