What is a Short Sale?

By Realty Times Published Oct 27, 2020 09:36 am

The idea of purchasing a home at a deeply discounted price is appealing to most people, but these situations can come with strings attached. One way to get a deal on a property is to buy a short sale, but the transactions are complex and risky.

Short sales are transactions where a home is sold for a lower price than the debt that’s owed. When a homeowner realizes they can’t afford their mortgage anymore, they can start the short sale process with the lender. The owner has to apply, and the goal is to avoid foreclosure.

Lenders will often approve a short sale if the home is worth less than what’s owed, and the seller has to demonstrate financial hardship. Short sales were incredibly common following the Great Recession in 2008, but have since become less so.

Short Sale vs. a Foreclosure

Sometimes buyers think a short sale and a foreclosure are the same, which they’re not. During a foreclosure, the bank repossesses the property. Then, the bank tries to sell it, often at a price well below market value, to cover their costs.

In both situations, financial hardships lead to the loss of the property for the homeowner, but the specifics vary.

In a short sale, the seller is voluntarily entering the process. A foreclosure is not voluntary for the seller.

For the seller, a foreclosure is much more damaging to their credit history, and they may end up having to file bankruptcy.

What Are the Benefits of a Short Sale?

For buyers, there are a few big benefits of buying a property in a short sale. The first is the lower price. A lender is very motivated to sell the property and cut their losses. Short sales may be less complex than traditional sales because there is likely to be less competition from other buyers. Your offer has a greater chance of being approved with less competition.

For sellers, the benefits of a short sale include preventing foreclosure and possible debt forgiveness. For a seller who goes through a short sale, they may qualify for a new mortgage after two years. It’s much harder to get another mortgage after a foreclosure.

Are There Downsides of a Short Sale?

For buyers, one of the primary downsides of a short sale is that it’s time-consuming. These transactions can take much longer than a traditional transaction. There’s also an increased level of risk for buyers because they’re buying the home as-is.

There’s also the possibility the transaction won’t go through, and the time will be wasted for the buyer.

Since the owners in a short sale are experiencing financial hardship, their homes may be in significantly worse condition than similar properties.

For sellers, there are quite a few pitfalls of a short sale too. Sellers don’t have any power to negotiate the price—only the lender can. The seller isn’t going to receive any profits when they sell the home because it’s owed to the lender, and short sales damage the owner’s credit scores.

Short Sale Tips

If you understand the possible risks and still want to look for a property that’s a short sale, make sure that you go into it prepared. While the property is sold as-is, you still need an inspection so you can figure out how much you’ll have to spend in repairs. You’ll also have more negotiating power with the lender if you can prove significant repairs are needed.

Even though short sales are a way to get a deal, you still need to be realistic with your offer. Your offer can be turned down if it’s too low.

It’s also a good idea to provide as much cash as you can because the lender will want to reduce their risk.