What is a Short Sale?
A short sale is a real estate term that is used to identify a home that is being sold at a price that is less than the total of all the liens on the property. These homes are in the foreclosure process but have not yet gone up to auction. Short sale homes must be approved by the lender who initiated the foreclosure process.
A short sale is different than a deed in lieu, which is used to transfer property ownership from the borrower/owner to the lender to avoid the foreclosure process. A short sale is the sale of the property where the proceeds from the sale pay off some of the outstanding mortgage(s)/lien(s). The remaining portion of the mortgage debt is generally forgiven by the lender(s).
The Short Sale Process
A home is sold through a short sale because the owner has been unable to make the mortgage payments and is in default on their loan. Rather than repossess the home through foreclosure, the lender gives the homeowner the opportunity to sell the property before it goes up for auction. The short sale window can be from three months to a year or more.
If a property owner knows they can no longer make the mortgage payments, they can approach their lender and request approval to sell the property as a short sale. In most cases, however, short sales are only accepted by the lender after the homeowner has defaulted on their mortgage and would no longer qualify for a refinance or loan modification.
If the bank initiates the foreclosure process, the lender will eventually send the owner a Notice of Sale. This will state the date when the property will go up for auction. The short sale occurs during this time period. The owner must have an accepted offer on the property before the auction date.
Once an offer is received, it must be approved by the lender. If the property has other liens, these junior lien holders will also have to either approve the short sale or release their lien. This process can take weeks or even months to complete.
Short Sale vs. Foreclosure
Homeowners and lenders prefer short sales over foreclosures. Though both processes will have a negative effect on the borrowers credit score, a short sale will have a slightly lesser impact. The short sale also gives a measure of control and dignity back to the owner. In both cases, however, the owner will lose all the equity in their home.
Banks prefer the short sale process because it is quicker than a foreclosure and they do not have to repossess the home. Lenders do not want to own property; they would rather deal with a lesser amount of money upfront then have to deal with foreclosing and reselling the property down the road.
How to Find Short Sale Homes
It is relatively easy to find short sale homes that are listed for sale. The vast majority of these properties will be listed with a real estate agent. These listings are part of the local Multiple Listing Service (MLS).
Another good source of short sale listings is through online databases that specialize in foreclosure, REO, short sale, auction and other discounted listings. Some investors find their properties off of craigslist or by finding properties that are for sale by owner (FSBO).
How to Buy a Short Sale Home
In most cases, offers on short sale homes will be made through a real estate agent. It is highly recommended to work with a real estate agent who specializes in the short sale process. Before submitting an offer, figure out your highest offering price, how much escrow money to put down, any repair costs and how you will pay for the property.
A purchase offer is first presented to the homeowner and then to the lender for approval. If there are any junior liens, these will have to approve the short sale as well. If there are multiple junior liens, the process can become very complicated, time consuming and has a high rate of failure.
It is very rare that a lender will accept the initial offer, so be prepared to receive a counter. If you believe that the counter offer is above market value, it is a good idea to submit with your counter a copy of a Broker's Price Opinion showing other similar recent sales plus a list of the problems with the property and the cost to correct them.
If a purchase price is agreed upon by all the involved parties, a typical closing will occur. Properties that are bought on a short sale will receive a warranty deed and are eligible for title insurance.
Buying Short Sale Condos
Buying condominium units through the short sale process is very similar to the procedure mentioned above. One additional consideration is regarding the Homeowner Association dues. If the homeowner is in default with the mortgage, it is more than likely that they have stopped paying the HOA dues as well. Before submitting an offer on a short sale condominium, make sure that you find out how much is also owed on the HOA and if the association is also pursuing foreclosure.
Short sale properties can be a true real estate bargain. This is not a quick process, but the cheap price can many times offset any frustration that comes from waiting for bank approval. To help make the transaction a success, stay well informed of where all parties are in the process and above all, be patient. The joys of owning your dream home for less than market value could be just around the corner.