Risks of Buying a Short Sale

Buying a property that is considered a short sale may be a lucrative investment option, however, there can be a number of problem when of buying this property. Buying any property may involve risks, but since short sale is much more complex so it is more risky as compared to the normal investment. Knowing the risks attached with a short sale can help you plan properly and let you decide whether you should make investment or not.

There are a number of risks of buying a short sale. Some of the major risks are given here.

Long Process

Earning profit from short sale is not an overnight process. If you are looking to make some quick profit, then short sale is not a better option for you. Short sale is a long and time taking process. It may take from weeks to months depending upon several factors. The length of time may be influenced by the lenders, short sale approval letter and type of the loan. Some of the lenders are easy to work with and some of them are really tough. If you lenders is difficult to work with, then short sale will take more than the normal time required for closing a short sale.

Mortgage Lender’s Approval

In a typical sale the transaction of sale of property only needs to be approved by the one person that owns the property. If the person approves the transaction with the defined terms and conditions, then the ownership of property is transferred to the buyer. But, in a case of short sale owner is not the only person that has to approve the short sale. Since the owner is trying to convince the mortgage lender to accept less than the amount owed on the property, so approval of lender is also required. Lenders are not necessarily too much willing to bear the loss on their loans. This process get more complicate if there are more than one lender or multiple lenders are involved. In case of multiple lender you will need to get the approval from all lenders. If any one of them does not approve the short sale, the property cannot be sold.

Counter Offer

Even if a short sale has already been approved by the lender, there is no guarantee that lender will accept you offer. They may believe that your offer is really low. If they think that your offer is too low, they make a counteroffer, flat or reject your offer and even they may not respond to your offer. This is a significant and real risk considering you could have already been waiting months to even get to this point.

If the lender makes a counteroffer, then it is not guaranteed that the price will be a price that you would be willing to pay based on the perceived value of the property. Except this, if there are multiple lien holders involved, it makes a harder part to get the approval of all lien holders. The first lien holder may accept the offer, but others may reject it. So, there will be more hurdles to get the short sale approved.

Opportunity Cost

Short sale is a lengthy and time taking process, so during waiting period you may miss other potential purchases. With all your time and resources tied up in short sale negotiations for months, you could miss out on an even better investment opportunity.

Cash Preference by Lenders

Another potential risk linked to the short sale is the cash preference by lenders for down payment. When dealing with a short sale banks and other lenders want to go with buyer that can pay payment in cash. They see them as less risky than a buyer who needs to get a large mortgage in order to purchase the property.

Short sale Qualification

Just advertising a property as a short sale does not mean that they are approved short sales. The sellers need to qualify for a short sale and get approval by banks or mortgage lender as well. Before getting involved in a short sale, you should always verify that the seller has been approved by their lender for one. If they have not, you could be wasting your time or could become involved in a process that will draw on for months or even a year.

Sale on “As Is” Bases

A property on short sale is sold on “as is” bases. If the home was vacant, then it may require a lot of repairs. A broken tab may have flood the floor and needs a good amount to repair. If a house requires repairs and banks is not willing to pay for them, then problem may arise and a short sale may be failed. It is suggested inspecting short sale house before making any kind of purchase decisions. If you proceed for buying a short sale without proper inspection, you may be inviting a number of problems. Be careful when buying a home on short sale. It is better idea to hire the services of a professional to inspect the home.