What do I need to know when making an offer to buy a house that's a short sale?

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Short sales can create challenges for many buyers. We asked real estate attorney Fran Pennarola of Chipman Mazzucco in Danbury, Connecticut to explain how short sales work. Here's what he told us:

A short sale—one in which the lender or lenders on the property are owed more than the property is worth—poses a number of challenges for a buyer. First, the time it takes to actually close on one is usually far longer than the typical 60 days or so that a conventional sale usually takes. In a short sale the lender approval process often involves intermediaries that create delays.

A short sale is not a good fit for someone who needs certainty because there may be multiple approvals required. Often there are second mortgage lenders involved, as well as private mortgage insurance companies who have to be persuaded that it is in their best interest to allow the short sale. Where there is a condominium involved, there are often delinquent common charges that have to be addressed with the condo association.A buyer who is dependent on a conventional mortgage may have difficulty maintaining his or her approval during the delay, with the attendant uncertainty of increased rates, new credit issues, etc.

Second, the seller has little, if any, room to negotiate any inspection issues. Short sales are typically “as is” sales.

Third, short sale homes are often in foreclosure, which can add further uncertainty to the process because of the vagaries of the court system, potential sheriff or marshal sales and added expense. There are always deadlines to contend with, add added expense in getting extensions of time. Finally, there is the probability of deferred maintenance.

On the other hand, there are certainly some potential upsides to a short sale. A buyer will be getting a home in a short sale that often has greater amenities than a similarly priced conventional home. If the market rebounds sooner rather than later, the upside may be greater in a short sale property. A short sale buyer can leverage “sweat equity” into greater value.