What Is A Short Sale and Is It A Good Idea As A Buyer?

If a homeowner is behind on their mortgage payments, owes more money than the property’s current value, and is in danger of foreclosure, a lender may agree to terms of a short sale. Short sales are neither short nor simple endeavors. Because multiple parties are involved, most buyers prefer to steer clear of short sale properties, but if you have the time to wait, you might be able to snag your dream home for a much better price.

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How do short sales work?

First off, it is important to understand the distinction between a short sale and a foreclosure property so you know exactly what you’re getting into.

A short sale is initiated by the seller in order to unload their property before foreclosure to help prevent an enormous foreclosure-related blow to their credit. A foreclosure is initiated by the lender, who repossess a home when the property owner can no longer make payments.

Since short sales are complex deals with multiple parties, lenders typically only approve short sales when foreclosure is unavoidable. Short sales do however present some advantages for lenders. A short sale is an opportunity for a lender to recover more of their investment than a foreclosure and they do not bear the responsibility of repossession and maintenance of the home until it sells.

Find an agent with short sale experience

Make sure you find an agent before you go looking at short sales. Short sales are not your typical real estate transaction, so working with an expert who can guide you is important. Top Florida agent Kathy Batterton says, “These sales can be tricky, and you are going to want a professional to hold your hand throughout the process.”

Look for a Certified Distressed Property Expert, a certification that is offered by the National Association of Realtors.

Short sale availability depends on the state in which you are looking. For example, Georgia and Alabama foreclosures happen very quickly, so you don’t see a lot of short sale opportunities in those states. In Florida, however, the foreclosure process takes about two years, so short sales often become a better option, says Batterton.

Real estate investor Chris McDermott of Jax Nurses Buy Houses echoes those thoughts and adds, “it is a possibility that short sales could rise in some states that have been more reluctant to open back up. This reluctance has dampened their economy even further. It could be 12 to 18 months before any uptick in short sales is seen, as lenders are doing their best to help homeowners avoid defaulting.”

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How do you find short sales?

Depending on where you live, short sales may be listed directly online. Batterton says, “in Florida, it is required to mark ‘short sale’ when listing the type of property.”

In some states the listings might not be as obvious. Be aware of phrases like “subject to bank approval,” “preforeclosure,” and “third-party review required” in listing descriptions as they may be subtle clues signaling a short sale.

You can also find short sales by digging into public records. These listings don’t have photographs, but they will typically include the bank’s name and how much is still owed on the house. If you find a property you’re interested in, it’s a good idea to research the house in public records to find out what if any outstanding liens are on the house.

When you are house-hunting, Batterton reminds buyers not to get “too excited when you see short sales listed with really low prices. It might look like a good deal online, but that price could be reflecting just a second mortgage.” In addition, a lender may not agree with a listing price and may want more for a property.

The best way to find short sales is to work closely with an agent. They know the market well, are regularly in touch with lenders, and can help you navigate the MLS system to find what you’re looking for.

How do you make an offer on a short sale?

The buying process for short sales is very different.

First, the seller has to accept your offer. Then the listing agent will send the offer to the lender for acceptance; you do not have a deal until the lender accepts. The offer for a lender includes multiple documents in an effort for the seller to make a case for the short sale.

Your short sale offer should include:

• The listing agreement
• The purchase agreement
• The buyer’s preapproval letter
• An appraisal or similar statement of the property’s value
• Information on the state of the home and repairs needed
• A photocopy of the earnest money check
• A short-sale package from the seller (including a list of liens on the house, if any)

It’s important to study comparable sales in the area before you make a short sale offer; your agent is an invaluable resource in this step. The bank is far more likely to approve the offer if it is close to the amount owed on the property.

The purchase agreement will state that the terms are subject to the lender’s approval and that the house is being bought as-is. Don’t skip the home inspection. Even though you’re likely buying in as-is condition, it’s best to know what as-is actually means.

When it comes to the purchase agreement contract, your agent plays a pivotal role in securing the most beneficial scenario on your behalf. Batterton says “it’s worthwhile to have your agent write the contract in such a way that if you find a house that you like as much or better, you can withdraw your offer and bid on it instead.”

Having a third party involved can make these deals more difficult. The bank will approve, counter-offer, or deny the short sale. If the buyer’s offer price is in line with the appraised value, it’s more likely to get accepted. Once all three parties have agreed, and everything is in writing and officially recorded, then it is on to closing.

You may be tempted to check things off your list during the waiting period, but Batterton recommends pausing. For example, she says, “Don’t spend the money on inspections until you know what the bank’s gonna do with the offer.”

What are the pros of a short sale?

The biggest pro is getting a good deal on a house. Many short sale properties are fixer-uppers, and buyers can often score an excellent price if they’re willing to do the work or pay for it themselves.

There’s also less competition. McDermott says that short sales are still a sizable portion of his business. “There’s typically less competition going after a short sale because most investors want fast money and they do not want to wait three to five months to complete a deal.”

When you’re weighing purchasing a short sale home versus a foreclosure, keep in mind that short sales are usually in better condition because they have been continuously occupied.

What are the cons of a short sale?

That good deal is not guaranteed

Real estate attorney Charles Gallagher represents clients in short sales; he stresses, “many first-time real estate investors will be tempted by a sales price only to find later that the property was a bad deal due to the condition or some other issue.”

Batterton says, “what we’re seeing right now is people are asking top dollar for short sales and lenders aren’t as willing to negotiate on the price.”

Investor Mike Qiu echoes her observations, saying, “homeowners’ lack of equity makes it a necessity to sell the house at the absolutely top dollar, which would not make a great investment in the majority of cases.”

They take a long time to close

Batterton says, “before my client goes under contract on a short sale, I make sure they understand that they will most likely be tied up with that property, including earnest money, for a full 90 days. And even after that 90 days, the deal might not go through.”

After you wait all that time, the bank could still deny the deal — and you’re back to square one.

Short sales can be very contentious

For the short sale to happen, every entity with a financial stake in the house has to agree. For example if a property has two mortgages with different lenders, and the sales price of the home won’t pay off the second mortgage, that lien holder may not get paid — and this can kill the sale.

Lenders are trying to recoup as much of their investment as possible, making these deals complicated. McDermott explains, “Depending on the lender or servicer, some can have unrealistic valuations of the property, making a deal impossible.”

Are short sales a good idea or bad idea for buyers?

In short, short sales are a good idea if you have plenty of time and money. A short sale buyer may get the property at a reduced price, but the property (in all likelihood) has its share of problems — think “fixer-upper” — and the deal needs to go through considerable red tape to make it happen. McDermott cautions buyers who want or need to close on and move into your new home as quickly as possible that, “you could wait to hear from a lender for three to five months and still not have a deal.”

If you are a buyer casually looking for a new home and come across a unique property you love and have time to wait, a short sale could work to your benefit. Batterton considers a scenario like this one of the only reasons a typical buyer would want to deal with a short sale.

“For a typical buyer, short sales come with a lot of unknowns,” Batterton reflects. “I’ve had just two short sales in the past few years. Most buyers don’t have time or energy to continue to actively look at homes after bidding on one and possibly start over again if the deal doesn’t work out.”

If you’re a real estate investor with experience in flipping houses, short sales could work for you. Batterton says “some investors don’t mind short sales if they have the time and money to wait for the deal to go through.” Short sales often attract cash buyers in many cases — and money talks. These buyers are more likely to have an offer accepted by a lender if they pay cash because there is less risk involved.

Even investors however, should be careful with short sales

These as-is properties can end up costing more than anticipated, so you’ll want to avoid overextending yourself and make sure the investment property is rentable/sellable after you fix it up.

The short sale process is neither short nor simple. If you do find yourself interested in a short sale home, it is imperative that you find an agent with plenty of experience who can guide you through this unusual real estate transaction. These deals can be frustrating, but if you have the patience, you could end up with a home you love at an even better price.

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