Short sales are far less common than they were during the market crash but still exist and are good to be familiar with. The need for a short sale typically arises when a homeowner who purchased their home in a high market needs to sell in a lower market. If they bought high and mortgaged a large portion of the purchase price, they are often in a position where they owe more on their mortgage than what they can sell for at today's prices. One option these owners have is to give their home back to the bank through the foreclosure process. But, another option, which is better for their credit and future home buying prospects, is to pursue a short sale. With a short sale, the homeowner actually asks the bank to accept an amount "short" of what the bank is owed on the mortgage. Banks are often open to doing this because the foreclosure process can be costly, and approving a short sale can sometimes save a bank both time and money.
In a short sale, the homeowner is still the owner of the home, not the bank. When you make an offer, you make it to the owner. The owner then signs it and submits it to their mortgage company for review and final acceptance. This period of review is what commonly makes the process of purchasing a short sale such a lengthy one. Since the bank desires to get back the most amount of money on their loan, they can spend two or more months evaluating the offer to determine whether to proceed with accepting less and selling now or paying the money to foreclose on the property and listing later. As a buyer, you may wait several weeks or months and get a YES back from the bank. However, you could also wait that time and get a NO back or a counteroffer at a higher price.
If you decide to proceed with offering on a short sale, be prepared to be patient in the process. As with the purchase of any home, you will want to accompany your offer with a preapproval letter from your lender or proof of funds from your bank. You will also want to remember that home owners who do short sales don't make any money from the sell of the property. All the proceeds go toward closing costs and paying back the bank. Also, these homeowners often don't have the means to do needed repairs or maintenance. So, short sale homes are commonly sold “as-is.” You are still encouraged to get an inspection on the property, but if repair issues exist those will be something you will need to take care of yourself after closing.
A short sale listings becomes a "contingent short sale" when an offer has been made, the owner has accepted, and the offer has been sent on to the bank for approval. In essence, the terms of the contract between the buyer and seller are "contingent" on the banks approval of the short sale. The listing will appear in "contingent short sale" status until the bank accepts the terms (in which case the the listing will change to "pending") or the buyer walks (in which case the listing would come back on the market). If you are interested in a home that is listed as a contingent short sale, you can still view the home and make an offer. However, your offer will usually be put in a "back up" position and will only be considered by the bank if the first buyers decide to terminate their contract.
Click HERE to view spreadsheet that compares and contracts foreclosures and short sales.