If you are searching for a home to buy there is a good possibility you have come across some short sale listings. They currently make up nearly 21% of homes available for sale in the Minneapolis-St. Paul metro area... but only about 11% of closed sales.
It is a common misconception to think that a 'short sale' means it must close in a short amount of time. Unfortunately, in most cases that is far from the truth... and one of the reasons why although the percentage of foreclosure listings is only about half that of short sales, the percentage of closed foreclosures is about 2.5 times that of short sales.
Rather than referring to time, a short sale means that the seller will be 'short' on funds to pay off the mortgage upon sale of the home because its value is less than the amount owed. This means that after coming to an agreement with a buyer, the seller will be negotiating with the bank (lien holder) to accept less than the total amount due as full payoff for the mortgage... and this usually takes weeks or even months.
A short sale also usually means that the seller is behind in mortgage payments, but at this point in the process the lien holder is often not as likely to accept as low a price as when it reaches foreclosure... which is part of the reason why average short sale prices are higher than for foreclosures.
If you are considering making an offer on a short sale property, here are some things you should know...
- Don't plan on a specific closing date, timelines are typically unknown where short sales are concerned but usually take months
- You must be pre-approved to purchase the property not contingent upon the sale of another property
- You may wait months, only to learn that the lien holder will not approve the short sale
- The more seller mortgages involved, the more difficult the short sale approval process
When you submit an offer to purchase a short sale property in Minnesota, it should include a Short Sale Contingency Addendum which gives options to be agreed upon between buyer and seller not found in traditional Purchase Agreements...
- Deadline for bank short sale approval (usually a minimum of 6-8 weeks out); if the seller fails to obtain approval by that date, the purchase agreement is cancelled and any earnest money you have submitted will be refunded to you
- Will earnest money be deposited before or after bank approval?
- Will the inspection take place before or after bank approval?
- Will the seller continue to offer the property for sale until after the short sale contingency is removed?
Answers to these provisions will depend to some degree on your commitment to the property. If you don't submit your earnest money or have your inspection until after bank approval the seller is more likely to continue to offer the property for sale... and buyers are more likely to continue looking for other properties in the meantime. This is the most common scenario, and it is fairly common for buyers to cancel prior to receiving bank short sale approval.
If you are committed to the property, however, it may make sense to have the inspection and submit your earnest money immediately upon coming to an agreement, as with a traditional purchase. Sellers are less likely to continue to entertain other offers, and it can save you time and frustration waiting for bank approval in case your inspection finds issues that you or your lender are not willing to deal with... you can just move on at that point.