In this painful housing market many home sellers are avoiding foreclosure by attempting to sell their homes in what's known as a "short sale. A short sale is where a home sells for less than what is actually owed on the mortgage.
The key is to know going in that you could be faced with some unexpected costs that don't usually come into play when buying a house the traditional way.
With a short sale, the seller is often in financial trouble, so you may be expected to pay those costs the seller normally pays. This could happen because the lender, who's already taking a bath on the price, just might refuse to approve the sale if these costs aren't covered. So if the seller can't pay them, should be prepared to pay these extra costs.
What these are depends on the situation. Some lenders will agree to assist with a buyer's closing costs while others won't. Some will pay broker's fees and others won't. If you agree to pay your broker a fee for finding the house and handling the deal, and the lender doesn't pay it, it will come out of your pocket.
You might also have to cover some other costs as well, such as homeowner association dues, appraisals, inspections, and any other liens, a second deed of trust, transfer and other fees and even the seller's back taxes.
If the price you and the seller agree to is lower than what the bank will accept, you may be asked to make up the difference, although this is something you could negotiate.
Some lenders may take months to decide whether to approve your offer. And when they finally respond, you should be on the lookout for a clause that asks for "liquidated damages." That could impose a daily penalty if you can't close in a certain period of time after the bank's approval.
Short-sale homes are almost always sold "as is," although some lenders will agree to pay for termite damage, or to correct safety or building code violations. But if there are any repairs to be made you will probably have to pay for them. You have to figure that since the seller was under financial stress to begin with, he or she probably let maintenance on the home fall to the side.
Having to cover some of these additional expenses may be a pain. Just keep in mind that they'll be worth it in the long run, so don't try to cut corners, especially on those expenses that protect you. For example, don't buy a short-sale home without paying for title insurance. That will protect you if there be any questions about the title. This is a possibility in any sale, but even more so in a distressed situation when there may be liens or other claims on the property. Also pay for a home warranty that would cover any additional repairs you may have to make after you move in.
