Should you consider buying a short-sale home?

A short sale means that the lender is not going to get all of their money back. The homeowner still owes more than the value of the house. If you buy the house for the fair market value, the lender accepts that payment even though it does not entirely pay off the outstanding balance on the previous loan.

For instance, someone bought a home in New York for $600,000. The property dropped in value faster than they were paying it off. Even though they made their payments on time and paid about $80,000, the value of the home fell to $400,000. If you buy it for $400,000, the former owners still owe $120,000, so the lender takes a loss.

Should you consider this? There are a few things to consider. On the plus side, you get a motivated seller. They clearly want to get rid of their poor investment.

One potential problem, though, is that the lender has to clear the sale. This process can be a bit more complicated than buying a home in the traditional fashion. It may take longer or you may run into unexpected red tape.

Beyond that, you also want to think about your investment. Why have property values fallen so fast in the area? Are they going to keep falling? Is the fair market value that you pay just going to leave you with an underwater mortgage in five years? Is that a risk you're willing to take?

As you consider all of these things, make sure you are well aware of the legal steps to take with a complicated home purchase.