What are the disadvantages of buying a short sale property?

Reader question: “There are lots of short sales on the market where we live. A few months ago, I didn’t really know what they were. But we are now in the market to buy a house, so I’ve been learning about them. I don’t want to rule out the perfect home just because it happens to be a short sale. But I’ve read some negative things online. What are the disadvantages of buying a short sale property? What kinds of things should we watch out for, as first-time home buyers?”

In this scenario, the homeowners are selling the home “short” of what they owe on their mortgage loan. Hence the term short sale. This means the home is probably priced below current market value as well (usually, but not always). Sometimes they are steeply discounted — other times only marginally discounted. It varies.

But let’s get to the heart of your question and talk about the possible disadvantages…

Disadvantages of Buying a Short Sale Home

In some cases, there can be disadvantages and downsides to buying a short sale home. But the process varies quite a bit. So don’t be frightened by the list of disadvantages below. These are just some of the things that could happen. That doesn’t mean they will actually happen to you.

Sometimes the short sale process is just as smooth — if not smoother — than a regular real estate transaction. In other cases, it can drag on for six months or more (though these situations are rare). A lot depends on the agent who is helping you put together your purchase offer, and the bank or lender that owns the property.

Here are the three biggest disadvantages of buying a short sale home:

1. The sale price might change.

In some cases, the price advertised by the seller and/or listing agent hasn’t been approved by the lender yet. The lender must approve the selling price in a short sale situation, since they are accepting less than they are owed. It’s possible to agree on one price with the seller, only to have the lender require a higher amount. This can be both frustrating and time-consuming for you, the buyer. This doesn’t always happen — it’s just something to look out for.

2. The process could take a long time.

In a short sale situation, it can take some time to get your offer approved by the seller’s lender.

In a regular real estate transaction (where the homeowner is paying off the existing mortgage balance in full), the seller can accept your offer within 48 hours, or even instantly if they choose to. It’s completely their call. But in a short sale, the offer must be sent to the seller’s lender for review and approval — and they might have a backlog to contend with.

It might take a month or more to hear back from them, and a couple more months to finish the deal. The closing date can be something of a moving target, which is stressful for a typical home buyer.

So the biggest potential disadvantage of buying a short sale property is the time factor. There is a joke in the real estate industry that a SHORT sale can take a very LONG time. They get the name because the homeowner is selling for less than what they owe on their mortgage loan — not for the length of time it takes. This might work out to your advantage in the form of a bargain. But you might have to wait weeks for the lender’s approval, only to receive a flat-out rejection or a counter-offer at a higher price. It can happen.

Of course, there are scenarios where things go smoothly. You just never know with short sales. They are all different. This uncertainty is another disadvantage of buying one of these properties.

The “typical” home buyer doesn’t have the patience or flexibility needed when buying a short sale. The typical buyer wants to move in as soon as possible, a mindset that is better suited for a regular real estate transaction with a standard 30- to 45-day escrow period.

But if you’re patient and flexible, and your primary goal is to get a good deal, buying a short sale might be the better option for you. What kind of buyer are you?

3. You could encounter some stiff competition.

Short sales are attractive to buyers because of their below-market-value pricing. This can also attract investors who are basically “professional home buyers” with cash in hand. So you might find yourself in a bidding war situation against seasoned (and potentially stronger) buyers.

These are the most commonly encountered disadvantages of buying a short sale home. But again, every scenario is different. You might encounter one of these issues, all of them, or none of them.