THE BLOG
09/06/2011 10:39 pm ET | Updated Nov 06, 2011

Are All Short Sales Bargains?

A caller to my law office said she was having a disagreement with her husband. They'd been bickering for a while as to whether "short sale" homes were all bargain priced. Hubby said they were the best deals in town, but his spouse was skeptical. As a real estate agent was calling day and night, extolling the "benefits" of focusing on her short sale listings, the couple wanted me to settle their spat!

Though I was flattered to resolve a marital fight, I was uncomfortable as well. Choosing one spouse over the other might have long-term consequences, and I didn't want to be responsible for this couple passing over their dream house or buying a nightmare. Therefore, I told my caller, the conclusion should be hers to draw, after I explained the cons and pros of the process.

A short sale provides definite benefits to both the seller and the real estate broker. Getting the lender to accept less than the full amount owed on the mortgage note (selling "short") dings a seller's credit score a bit less than a full-blown foreclosure would. If the house sells on the courthouse steps, the real estate broker and agent earn zero, but closing a transaction in advance of a final decree guaranteed them a commission (which might be 1-2 percent higher than in a "regular" deal, but that's a subject for another day).

When it comes to buyers, short sales offer no clear-cut advantages. Delays abound and opportunities arise to reduce the whole transaction to a giant waste of time. Mortgage holders require signed contracts before formally deciding the merits of individual short sale applications, so a buyer must pony up the downpayment and apply for a mortgage (which usually involves a non-refundable application/appraisal fee). Hanging over the deal is a clause declaring the contract null and void if the lender deems the deal unworthy. Though the downpayment is returned, the buyer's bank fees are lost (short sellers rarely cover these fees, citing "no money," but that's another subject for that other day).

Lenders won't approve deals netting less than their borrowers owe until and unless these would-be short sellers submit proof of comparable sales prices. I told my caller that I rarely see buyers score "bargains," as most successful short sales match market prices in the neighborhood.

Sensing victory, caller-wife jumped in with a few questions, just to be sure. "You're saying a house listed as a short sale is probably priced like similar houses? I might spend money I won't get back, and I could waste a lot of time?"

Yes, caller, your conclusions are correct! The house might be desirable, and the deal might work out without a hitch, but if her spouse thought all short sales were slam-dunk bargains, he was mistaken.

"I knew I was right! I knew no one was doing us a favor," said the triumphant wife.

Indeed, why would they?