A short sale is the sale of property that has accumulated more debt than its market value. For a short sale to occur, the lender must agree to accept less than the total amount owed on the property.
A short sale is complicated, however, and it’s common for sellers seeking a short sale to have more than one mortgage on the property and possibly additional liens for home improvement work, utilities and even overdue homeowners association payments. As a result, the buyer in a short sale should expect the process to take longer than the usual 30 days. In fact, depending on the number of debts the seller incurred, it could take as long as six months to close on a house in a short sale.
Short sales are often seen as a common last-resort option during tough economic times. In the Great Recession, the U.S. Treasury Department released guidelines and incentives to lenders to allow for short sales to take place easier and faster, in an effort to reduce the number of foreclosures occurring nationwide.
[Read: The Guide to Buying a Home.]
In happier economic times, however, both short sales and foreclosures are down. Short sales made up just 1 percent of total existing home sales in August this year, according to the National Association of Realtors monthly home sales report. Combined with foreclosure transactions to account for all sales of distressed properties – or those that have debt issues – just 3 percent of all sales in August were distressed, which is the lowest share since NAR began tracking them in October 2008. In 2010, distressed sales peaked above one-third of all existing home sales, according to NAR data.
The benefit of buying a short sale is that you’re getting it for a low price, and the complications of the transaction make it so you’re far less likely to have competing offers from other buyers.
The downside is that you’re buying a house that’s been underwater financially for some time, since lenders often use a short sale to avoid the foreclosure process, and they’re ultimately losing money in the deal. You’re also walking into a transaction that’s more complicated than a regular home purchase – you have to receive approval from all lenders involved and negotiate liens with various other entities. All it takes is for one lender to refuse your offer for the deal to fall apart, which means there's a higher chance that the deal fails.
John Myers, owner and qualifying broker of Myers & Myers Real Estate in Albuquerque, New Mexico, is a certified distressed property expert and has been a part of many short sales. He says a major obstacle to beginning a short sale is getting the seller to provide the necessary information to move forward with the short sale.
“They require a tremendous amount of information,” Myers says, including pay stubs, tax returns, banks statements and more for the lender to evaluate why the seller is trying to do a short sale.
It’s not just a matter of being forthcoming, but also proving that a short sale is the best financial move, Myers explains: “If they make way too much money or have way too many assets, the bank probably won’t accept a short sale.”
In a city or market where home values are rapidly rising due to housing shortages, short sales are less common because buyers are willing to pay a higher price. A Trulia report released in September reveals home values across the U.S. have grown more than 45 percent between mid-2012 and mid-2018.
You’re more likely to see short sales and distressed properties in markets that haven’t fared quite as well – notably in non-metro rural areas, according to the Trulia report. “Since the recession, [home values there have] kind of fallen flat,” says Felipe Chacón, a housing economist for Trulia.
The areas where property values are stagnant and population is dropping may be the place to find more short sale opportunities, “I would predict it stabilizing a little bit,” Chacón says.
Because real estate markets operate on a cycle, you can also expect property values to slow their growth in the places where houses go fast and prices run high right now. While elevated rates of underwater homes and an increasing number of short sales can be an indicator of tough economic times for an area, you can also expect it to happen more than once over the year (though not as frequently as in the recession).
Whether you have a house in mind that’s listed as a short sale or you’re hoping to benefit from a good deal down the road, here are seven things you need to know about buying a home in a short sale.
You don’t determine the timeline. When you submit an offer for a short sale, it goes on to the lender – and sometimes more than one lender – to decide whether to accept it. While in a normal market deal you’ll hear back within a couple of days, if not a couple of hours, expect to wait a few months to hear back from the lender. Then expect at least an additional month to sort through additional information, approvals and liens to be able to head to the closing table.
Myers says buyers looking to purchase a short sale should essentially have no timeline restrictions because they won’t be able to command a speedy response from the bank. “If they’re not willing to wait that four to five months, then it’s probably not the right deal for them,” he says.
There’s a good chance you’re getting a great price. A short sale is a great opportunity for a homebuyer to purchase a home for likely less than what other comparable properties in that neighborhood are going for. And because you’re willing to take on the extended process, you aren’t competing with other buyers.
Even if your area sees a lot of home purchases by investors, a short sale may help you avoid higher prices and stiff competition. Myers says he sees that about 70 percent of buyers in a short sale deal are homebuyers simply looking for a better deal, while about 30 percent are investors.
Short sales are harder to find when the market is good. The seller may have negative equity in a home, but if the market is hot and few houses stay on the market for long, the heightened buyer interest can make it a regular market transaction.
The seller may also learn that another option is better for them to get out from under debt – either a deed in lieu of foreclosure or actual foreclosure itself, Myers says. But hopefully the seller will have already weighed those options before you come along with an offer.
A lot of approval is required. All lenders involved with the property have to agree to the deal, and the multiple levels can take a long time. If there are additional liens on the property, you may also need to negotiate payment to make it debt-free.
You’re buying the house as-is. When you’re buying a house in a short sale, it’s been deep in debt for a long time. As a result, there’s likely some deferred maintenance the homeowner could not afford to tackle. All short sales are as-is, and in most cases the lenders will not pay for an inspection. Be prepared to not only take on all updates and fixes, but also cover inspections to help you discover what work is needed.
You want experienced professionals. Short sales are complicated, particularly on the seller side, so it’s important that you're confident the real estate agents involved know what they’re doing. Myers stresses that as the buyer, you should ask the listing agent about his or her experience.
“If the listing agent doesn’t have a lot of experience doing short sales, the short sale may never get done,” he says.
It might not work out. Even if you do everything right, there’s always a chance that one lender involved will be unwilling to agree to the deal. In that sense, buying a house in a short sale leaves some factors to chance, which can be frustrating after you've waited months to hear back. Be prepared to move on and start over again.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.