Get a great deal on a short sale

A few years ago, few people had heard about short sales, which occur when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth. Nationwide, 14% of home owners are currently underwater on their mortgages, according to Zwillow.com.

The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the rundown properties that you see with foreclosures. The only downside to purchasing a foreclosure is that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on a lot longer than a normal home sale. But the hassles can be well worth it.

Tips and the process

Some buyers don't want to deal with short sales, leaving many choice homes with few bidders. The key to getting a good deal is knowing how to avoid the land mines.

  • - A good rule of thumb is to allow 4-8 weeks for a short sale purchase. So if you're moving or selling another property, keep in mind you may need to find somewhere to live during that time.

  • - You will want to weed out the candidates. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal.

  • - You may want to avoid homes that have other offers. If another offer is pending, the seller's agent won't always submit yours for approval until the first one is rejected.

The first step is for me, as your agent, is to submit the offer to the seller. You don't want to rely on the current list price to come up with your initial bid. The seller's agent may have far under-priced the house in hopes of attracting buyers, but the bank likely won't accept a lowball offer.

As your agent, I would determine the home's fair market value by searching comparable sales in the area with the emphasis on other short sales and foreclosures. At this point you'll want to get a pre-approval from a lender. Most banks won't even consider an offer if you don't have one.

At this point you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract. Also, it would be a good idea to specify that you won't do an inspection until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you have a good chance of getting the home.

Don't put down more than $3,000 for the earnest money, that will give you room to put offers on other homes if the sale drags on too long. Short sales are good deals. With people getting turned off by them it just means more choices for the rest.