Maybe someone has told you to steer clear of short sales, or maybe you’ve heard they’re a great deal! No matter what you’ve heard, the bottom line is this: Buying a short sale home is a complicated process. In fact, very few short sales are completed within 30 days. Knowing whether or not it’s worth all the extra effort depends on your specific situation. Before you jump on a house with a "too good to be true" price, you need to understand how the short sale process works and connect with your real estate agent for more details.
What Is a Short Sale?
A short sale is the sale of a real estate property for which the lender is willing to accept less than the amount still owed on the mortgage.
For a sale to be considered a short sale, these two things must be true:
- The homeowner must be so far behind on payments that they can’t catch up.
- The housing market must have gone down so much that the house is worth less than the remaining balance on the mortgage.
In most cases, the lender (and the homeowner) will try a short sale process in order to avoid foreclosure.
Overall, there are a lot of misunderstandings around short sales. But one common misconception is that lenders just want to be rid of the property and will move quickly to get as much money back as possible. In reality, the lender will take their time to recover as much of their loss as they can. Here’s the thing: Just because a property is listed as a short sale does not mean the lender has to accept your offer, even if the seller accepts it. This is what makes the short sale process so tricky.
For homeowners, a short sale is typically preferable to a foreclosure for two reasons. First, a short sale is voluntary (while a foreclosure is forced). Secondly, after a foreclosure, most people are required to wait a standard seven years before obtaining another mortgage loan (while a short sale may cause you to wait for at least two years).
Most lenders would prefer a Short Sale vs. Foreclosure
Neither a short sale nor a foreclosure is an easy way out for sellers who want to be rid of their home mortgage.
In a short sale, the homeowner initiates the sale of their house. For a short sale to take place, the home must be worth less than the amount the homeowners owe, and they must be so behind on their mortgage payments that they don’t think they can catch up. Potential buyers will deal with the home sellers during the short sale process, but all of the details around the process must be reviewed and approved by the lender. The short sale cannot happen unless the lender approves it. Because everything is dependent on the lender, the short sale process can be lengthy and unpredictable—even if the homeowner and the potential buyer agree on terms.
On the other hand, in a foreclosure situation, the bank takes ownership of the home after the buyer is unable to make payments. This process is initiated by the lender. The lender will force the sale of the home in order to try to recover as close to the original loan amount as possible. Most foreclosed homes have already been abandoned, but if the homeowners are still living in the house, the lender will evict them during the foreclosure process. The lender will then attempt to sell the property either through an auction or through a real estate agent. The foreclosure process typically takes less time than a short sale because the lender is trying to liquidate the home as quickly as possible.
Which Is Better?
Short sale to a foreclosure process because it allows them to recoup as much of the original loan as possible without a costly legal process. In fact, in most cases a homeowner and lender will only pursue a foreclosure after an attempt to sell the home through a short sale process.
How Does a Short Sale Work?
If you’re wondering what the standard steps are that typically happen as part of the short sale process, look no further.
Step 1: The homeowner starts by talking to their lender and a real estate agent about the likelihood of selling their house via short sale. At this point, they may submit a short sale package to their lender. They’ll also have to prove to their lender that they’re no long capable of making their mortgage payments and have no assets that would allow them to catch up on payments.
Step 2: The homeowner works with a real estate agent to list the property. They’ll execute a sales contract for the purchase of the property once a buyer is interested. However, this contract is subject to the lender’s approval and is not final until then—even if both the seller and the buyer agree on the terms.
Step 3: The lender reviews the contract and could then respond in a variety of ways. They could choose not to respond at all, they could reject the offer, they could reject the offer but outline which terms they would agree to, or they just might approve the offer.
Step 4: When the lender’s response is presented to the potential buyer, the contract will either stay the same or the buyer will choose to appease or reject the lender’s terms. So, at this point, the ball is in the buyer’s court!
Step 5: If the contract is approved, the short sale property closes and the home is transferred to the new buyer. The lender receives all proceeds from the sale of the property and releases the original homeowner from their mortgage loan—even though the full mortgage balance was not paid off by the proceeds.
How to Buy a Short Sale Property
If you’re considering buying a short sale property, here are some tips to keep in mind throughout the process.
1. Do your research. Before placing an offer on a short sale property, work with your real estate agent to do investigative work on the property. Your agent can check public records to see how much money the homeowner still owes on the mortgage. Between that and the comparable properties in the area, your agent should be able to give you good advice about making an offer.
2. Understand the lender is calling the shots. You may be working with the seller and their agent to submit an offer, but keep in mind that, ultimately, the lender’s in control of the short sale process.
3. Always do a home inspection. You may be tempted to waive the inspection when buying a short sale to speed up the process, but that would be a big mistake. You should always hire a professional home inspector to evaluate the home. Buying a house without a proper inspection can be disastrous.
4. Partner with an expert real estate agent. Whether you’re selling or buying in the short sale process, you need an expert real estate agent who has specific experience with short sale properties. Because short sales are so complex, you’ll need a real estate agent you can trust to walk you through the process and answer any questions you have along the way.
Why Lenders Do Short Sales
The only reason a lender would want to go through a short sale process—and, therefore, accept a mortgage payoff amount that’s less than the balance owed—is because they believe it’s their best chance to recoup as much of the mortgage loan balance as possible.
Because of that reason, a lender will not consider a short sale if:
- The loan is current. If the homeowner is making regular payments, the lender has no reason to think they can’t continue making them. (That’s a no-brainer!) Usually, the homeowner must be issued a notice of default in order for the lender to even consider a short sale request.
- The homeowner declares bankruptcy. Negotiating a short sale is considered a collection activity, which is not allowed in bankruptcy.
The only benefit to the lender is that a short sale is faster and less expensive for them than a foreclosure. Once it’s clear a foreclosure is going to be unavoidable, a lender is more likely to approve a short sale request.
Why Homeowners Do Short Sales
If a homeowner is considering a short sale, things have gotten bad. For them, a short sale means losing their home without a profit. Plus, they also have to endure the emotional stress of convincing the lender to allow them to do it. Selling a house through the short sale process is never ideal; the only reason a homeowner would want to do it is to avoid foreclosure.
Throughout the process, the homeowner’s focus is convincing the lender that a short sale is the best option. The homeowner must:
- Prove they won’t be able to bring the mortgage current and that they have no assets—cash, savings, cars, etc.—that can be used to catch up on payments.
- Confirm the local housing market value has gone down so low that the home won’t sell for enough to pay off the current balance of the mortgage.
- Provide most lenders a signed contract with a buyer to consider a short sale.
- Make sure the short sale agreement includes a waiver of the lender’s right to pursue the homeowner for the remaining balance of the loan.
In order for a short sale to take place, both the lender and the homeowner have to be willing to sell the house at a loss. The homeowner will make no profit, and the lender will actually lose money for selling the house for less than the amount owed.
A short sale is not a do-it-yourself deal. A real estate agent who’s experienced in short sales is absolutely essential.
3 Things to Consider Before Buying a Short Sale
There’s not a cut-and-dry answer to whether or not you should purchase a short sale home. Deciding if a short sale property is right for you depends on your specific situation and the details of the property.
One thing is certain, though: If you want to buy a short sale property, in most cases you need to be prepared for a lengthy, complicated process.
Here are three things you should know before submitting an offer for a short sale property:
1. The timeline will be slow and unpredictable.
Because the lender has to approve the short sale contract, it can take weeks or months before you know if your offer has even been accepted. There’s no way to know exactly how long the process will take since it’s completely up to the lender and their willingness to sell the home at that price.
2. You’ll probably have to buy the house as-is.
Because the lender is in the driver’s seat, it’s also unlikely they will agree to pay for any extras, like closing costs or requested repairs. You may not be able to ask for repairs, but you should always get an inspection so you know exactly what you’re signing up for when you purchase the home.
3. You may not be getting a great deal.
When a short sell listing hits the market, it may be listed for less than it’s worth to draw buyers in. But that doesn’t mean that’s the price it will sell for. In the short sale process, the lender typically doesn’t evaluate the price until there’s a proposed contract and an appraisal—because they’ll want to get a price as close to market value as possible.
A seller might be ready to accept an offer lower than the list price—maybe for the ideal closing situation or because they have a rushed timeline. However, the lender’s goal is to lose as little money as possible in a short sale. While there may be instances where a short sale property really is a great deal, that won’t always be true—so be careful.