The median home sale price reached a record high in April 2024 at $432,903. Experts predict prices will continue rising in the coming months. However, you can buy a home through a short sale. As it offers a cheaper alternative to achieve your American dream of homeownership.
In 2024, 31,649 homeowners faced foreclosure after failing to make mortgage payments. To avoid foreclosure and its negative impact on credit scores, struggling homeowners choose to do a short sale.
Short Sale: What Should Buyers Know?
- Buyers can find properties priced below market value through short sales.
- Short sale transactions can take longer to complete between 3 to 6 months due to lender approval and negotiations process.
- As short sales are distinct from traditional sales, buyers must carefully weigh its benefits and risks.
What Is a Short Sale?
A short sale happens when a homeowner sells their house for less than the amount they owe on their mortgage. This is when the homeowner faces financial struggles and can’t afford to make their mortgage payments.
The three main parties involved are the lender, the homeowner, and the buyer. The lender must approve the short sale. They accept the proceeds as full payment on the outstanding loan, even though it is “short” of the total amount owed. It allows the mortgage borrower to avoid foreclosure.
Short Sale vs. Foreclosure
Very often, people confuse a short sale with a foreclosure. Here’s how they are different:
- In short sales, homeowners sell the property for less than the remaining loan balance with the mortgage lender’s approval. The lender can either give a deficiency waiver judgment or require the homeowner to pay the deficit balance.
- In a foreclosure, the lender seizes the property when a homeowner defaults on mortgage payments. It ultimately leads to the seizure and selling of the house.
Both short sale and foreclosure can impact a homeowner’s credit score and financial stability.
How Does a Short Sale Work for a Buyer?
Here are the 5 steps on how a short sale works for a home buyer:
- Get Pre-Approved for a Mortgage: Obtain a mortgage pre-approval before you start the short sale process. This step showcases your commitment and financial readiness to the distressed homeowner and their lender.
- Find a Suitable Property: You can search for homes for sale and find your dream home. Also, a real estate agent can help you identify properties listed as short sales or pre-foreclosures. Research the property’s condition and fair market value to understand the seller’s situation.
- Submit an Offer: Submit your offer to the seller’s agent after researching the property. The seller may accept, reject, or negotiate the terms. If accepted, the offer goes to their lender for approval.
- Wait for the Lender’s Approval: The homeowner’s lender will review your offer and may order a home appraisal. This process can take several weeks or months. In the meantime, conduct due diligence, such as a home inspection, and review seller disclosures.
- Complete the Purchase: Once the lender approves your offer, finalize the purchase agreement, secure financing, and address any contingencies. After closing, you can take possession of the property.
How Does a Short Sale Work for a Seller?
Here are the 5 steps on how a short sale works for a seller:
- Assess Financial Hardship and Contact Lender: As a seller, start by assessing your financial situation to determine if a short sale is necessary. Contact your lender to discuss your hardship and request approval for a short sale. You will be required to provide documents like a hardship letter.
- Hire a Real Estate Agent: Find a top real estate agent experienced in handling short sales. They will help list and market your property as a short sale.
- List the Property and Submit Offers: List your home at a price close to the remaining mortgage balance. Review and select offers with your agent, then submit the best offer to your lender.
- Lender Review and Approval: The lender will review the submitted offer, which may include an appraisal and a detailed review. This process can take several weeks or months.
- Close the Sale: Once the lender approves the offer, proceed with the closing process. Sign the necessary documents and complete the sale.
How Long Does It Take for a Short Sale to Close?
Unlike a traditional home sale, short sales can take longer to close. Plan for anywhere between 3 to 6 months, though it can be shorter or even longer depending on the situation. Here’s why:
- Lender Approval: The lender holding the mortgage on the property needs to agree to the short sale amount. This process can involve negotiations and paperwork which may take some time.
- Multiple Offers: Short sales can attract interest from bargain hunters. If there are competing offers, the bank will need to consider each one.
Once the bank approves your offer, closing can happen relatively quickly, within 30 to 45 days. Pre-approving your finances and completing inspections in advance can significantly speed up the closing process.
Should You Buy a Short Sale House?
As a buyer, considering a short sale property can have both benefits and risks.
✅ Benefits of Buying a Short Sale Home
- Discounted Price: Short sales allow you to purchase a property below market value. This can result in significant savings for you.
- Investment Opportunity: If you have the resources, a short sale home bought at a low price could be a good investment property. By making repairs and renovations, you could resell the property later for a profit.
- Less Competition: There may be fewer interested buyers due to the complexities involved in short sales. This may increase the chances of your offer getting accepted.
❌ Risks of Buying a Short Sale Home
- Lengthy Process: Short sales take several months due to the lender approval process.
- As-Is Home Condition: Short-sale homes are usually sold in “as-is” condition. Due to financial difficulties, the seller may have neglected maintenance.
- Limited Disclosures: Seller disclosures might not cover all the details about the home’s condition. You’ll need to inspect thoroughly.
Bottom Line
Buying a short sale home can be a great way to find a home at a discounted price. You can potentially save a significant amount of money when compared with traditional home buying.
However, short sales take longer to close typically, 3-6 months. Be prepared to wait a few months, since the bank needs to approve it. But with some patience, you could end up owning a house for much less than market value!
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Frequently Asked Questions
What does a short sale mean?
A short sale is when a homeowner sells their property for less than the outstanding mortgage balance owed to the lender. The lender agrees to accept this "short" payoff amount to avoid foreclosure.
Is a short sale same as a foreclosure?
No, short sales differ significantly from foreclosure. Homeowners can sell the property at a lower price, with the lender's approval in a short sale. In a foreclosure, a legal action is initiated against the homeowner to seize and sell the home.
How long does it take to do a short sale?
Short sales can take anywhere from 3 to 6 months to complete, although the timeline can vary depending on the situation. The primary reason for the lengthy process is the need for lender approval, which involves negotiations and paperwork.
