Are you seeking out a deal in the booming Southern California real estate market?

If so, you may have come across listings marked as “short sale.” But what exactly is a short sale? Put simply, it’s when a property is sold for less than the outstanding mortgage on it. In theory, a short sale sounds like a simple choice – who doesn’t want to get a bargain deal – but in reality, the process of purchasing a short sale can come with complications that you need to know.

How A Short Sale Works

Let’s say a homeowner purchased a property in Riverside County with a $500,000 mortgage ten years ago. In that decade, perhaps the homeowner came across some financial troubles and had trouble paying for the loan. Meanwhile, the property value dropped and all of a sudden, the outstanding mortgage is for more than the property is now worth. The seller can ask the lender if they can sell the house for the current market value instead of for the mortgage amount, meaning the lender takes a hit but at least is guaranteed to recoup some investment.

When Buying A Short Sale Is A Good Idea

For sellers, a short sale allows them to avoid the foreclosure process and maintain their credit rating. For buyers, a short sale means potentially saving on the overall home price – and a lot of upside potential.

Buying a short sale can also come with fewer risks than purchasing a property in foreclosure. In most cases the property is still occupied, being maintained, and the sellers still have a stake in having the house sell at a high enough price to appease the lender.

When Buying A Short Sale Is Not A Good Idea

The homeowner’s lending institution must approve a short sale. However, you will be dealing directly with homeowners when negotiating and purchasing a short sale, so it’s crucial that you verify that the lender does, in fact, support the transaction.

The homeowner is responsible for running any negotiations by the bank, who ultimately must approve the sales price, which can end up lengthening the time between making an offer and closing. In fact, while most real estate transactions aim to close within 30 days, a short sale can take up to a year because of the paperwork required. If you’re looking to buy a home to live in, the extra time and money spent waiting for a short sale to close could negate any potential savings.

With a short sale, you’ll also lose out on the ability to negotiate contingencies and repairs for any issues found in a home inspection. When you buy a short sale, the property is purchased “as-is,” meaning you won’t be able to negotiate with the seller to pay for repairs or updates.