A “Short Sale” is when the sale of the property does not net the seller enough funds to pay the full mortgage and the mortgage company discounts the note. These properties are often nearing foreclosure and the mortgage company would rather discount the mortgage than go through the costly and time consuming process to foreclose. Purchasers should be aware that the seller in this situation usually does not have the final authority to accept a contract without lender approval. Often the lender is slow to provide approval of the contract and many times the purchaser will not know until just before closing whether the bank will agree to the short sale.
The risks involved in purchasing this type of property involve paying for inspections and appraisal while there is no written commitment from the lender that they will agree to the sale. If they do not close on the property then you will not be able to recover any out of pocket expenses. Additionally if you are not an investor and you are planning to move into the property you may be changing your plans at the last minute. This is perhaps easier for a single person who is currently renting than it would be for a family with small children that has already agreed to sell their current home.
The reward from the purchase of a short sale is achieved only if you purchase the property below current market value or of you really want that particular piece of property. As stated above a short sale simply indicates that the bank is discounting the amount they are owed in order to facilitate the sale. A property could be worth $90,000 and the seller owes $100,000 and the lender discounts $5,000. It is considered a short sale even if you just paid $5,000 more than the property is worth. If you purchase the same property for $85,000 then you just made $5,000 in equity for taking the risk.
Your real estate professional can help you minimize the risk and maximize the reward by including proper provisions in the purchase offer and by providing a market analysis of the property before you begin the process.