Buying a short sale can be tremendously profitable, and the current condition of the market makes it a great time to buy.

A "short sale" is a home sale where the selling price is below the amount owed to the lender on the home. Lenders may agree to such a sale if foreclosure seems imminent.

Realtor
Make sure you work with a Preferred Partner (Buyer's Agent) to locate the home and to contact the owner or the listing agent. The Preferred Partner may offer valuable insight into the area, recommend one home over another, provide photos of the exterior and interior of the home (especially valuable when buying outside of your local area.) Many of our Preferred Partners have specific experience in the short sales market. Pick someone who is comfortable with short sale transactions; this will make the whole process a lot easier.

Home Inspection
Be sure to carry a thorough home inspection with a home inspector, and ideally with a licensed contractor. Be present and participate in the inspection, making notes of anything that the inspector may point out. Take photos, and add these to your file for that home. This will be ammunition at the time of negotiating the price.

Making an offer
A few years ago it was common for homes to be sold over the asking price. Back in 2003 it was common to see bidding wars between home-buyers. But times have definitely changed. Now, an offer above the asking price may actually be detrimental. It may cause red flags at the seller's or lender's end. Long-time foreclosure investor Chris Liddle advises offering as low as 12% below their asking price. This will likely result in a counter-offer, but in the end you'll negotiate a mutually-agreed price which is still below their asking price.

Keep in mind that many lenders will simply not respond if they deem your offer too low. If you have not heard back in two weeks, it's worth it to contact them and see if you should submit a new offer.

Be aware of the other components of your offer. If you have excellent credit and preferential financing, or if you're making a cash offer, then you should know that this will be viewed more favorably than other offers - with this in mind, you can come in a little lower and be fairly confident your offer will be accepted.

If your offer is rejected, you can still make a higher offer. Don't bother with small increments ($1,000 or so) - this will just waste your time and theirs. A good guideline is to stay within $25,000 or the appraisal.

Your offer will need two approval points: the seller will give initial approval, but ultimately it will be up to the bank to decide if they're willing to take the loss on the property. Remember to submit your offer with all details of your home inspection, which will lend credence to your arguments. If your offer is strong in terms of your credit, the financing, etc. make sure to attach a letter explaining these strong points.

Once the offer is accepted, the home purchase will follow the traditional path, and you'll soon find yourself a proud home owner. Good luck!