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.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
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.
Devon Thorsby | June 5, 2019
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.