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, 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 to unload their property before foreclosure, helping prevent an enormous foreclosure-related blow to their credit. A foreclosure is initiated by the lender, who repossesses 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. However, short sales do 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.
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 their 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 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.
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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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- Selling a house in foreclosure
- Selling a house in foreclosure
Emily Hines
Contributing Author
Emily Hines is a writer and content strategist with 8 years of professional experience focusing on architecture, travel, and culture and contributes to a variety of publications including USA Today, TimeOut, and Craftbeer.com. She holds a Masters in Historic Preservation from the University of Georgia and is currently based in Marquette, Michigan where she writes a monthly travel blog, drinks craft beer, and skis.
Jedda Fernandez
Associate Refresh Editor
Jedda Fernandez is an associate refresh editor for HomeLight's Resource Centers with more than five years of editorial experience in the real estate industry.
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