A short sale one in which a homeowner's lender has given him permission to sell the home for less than he owes on his mortgage. A seller usually resorts to a short sale after he runs out of less drastic options, like mortgage modification, to avoid foreclosure. If you're considering purchasing a home in a short sale, work closely with your real estate agent to mitigate your risks by leaving yourself ways out of your short sale contract.
Inspection Contingencies
Short-sale sellers often move out of their homes soon after they list their homes for sale. The longer the home sits vacant, the more it deteriorates. Even if the seller stays in the home until closing, her financial hardship and the face that she has, for all practical purposes, lost her home, makes it unlikely that she'll keep up with the expense of maintenance. To make matters worse, short sales are sold as-is -- neither the lender nor the seller will make repairs. It's vital that a short-sale buyer includes in his sales contract inspection contingencies that allow him to cancel the sale if the home fails one or more inspections.
Mortgage Contingency
A mortgage contingency allows a buyer to cancel a sale if she's unable to secure financing for the home. All home purchases that rely on financing should include this contingency. It's even more important with short sales, however. Not only does the mortgage contingency ensure the buyer won't be stuck with a home she can't pay for, but it also protects her in two other ways: when a serious maintenance issue arises after the inspection contingency period ends and when the home doesn't appraise for the purchase price. In neither case would the buyer's lender issue the loan unless the buyer were to meet certain conditions. By refusing to meet these additional conditions, she loses her financing and, per the contingency, can cancel the sale.
Limit Time Before Release
Making an offer on a short sale often requires that the buyer sign a short sale addendum to the sale contract. The addendum attempts to prepare the buyer for what might be a long, frustrating process. One of the terms common to short sale addenda is the amount of time the seller asks the buyer to wait before backing out of a sale because of the lender's failure to communicate that it has accepted or declined the offer. The realistic waiting time depends on the market. In some, answers come relatively quickly. In others, they take many months. In the meantime, the buyer can't make an offer on another home unless he's willing to either make the second purchase contingent on his failure to purchase the first, or risk being liable for the purchase of two homes. A buyer who agrees to a relatively short window of time avoids missing too many other opportunities while he's being "held hostage," so to speak, by the bank's failure to make a decision.
Limit the Seller's Damages
If the buyer ultimately has no choice but to break her contract, she can minimize the consequences by putting down only the minimum deposit, usually $1,000 for short sales, and by including in her contract that the seller's damages are limited to that deposit. This prevents the seller from suing the buyer, whether for other monetary damages or to force her to go through with the sale, in the event that the buyer backs out.
Tags: short sale, cancel sale, short sales, mortgage contingency, sale contract
