Today’s real estate market is tough on homebuyers. With low inventory, rapidly rising home values and wages that haven’t yet caught up, finding a home in your price range that doesn’t have multiple offers can be a difficult task.

If you've encountered this already, it may seem like the right time to look at a distressed property – a home facing foreclosure or one that has already been foreclosed on – to find a price point better suited to your budget.

A short sale occurs when there is more debt on a home than the property itself is worth. If the property owner is considered to have substantial hardship that the debt cannot be repaid in full, the lender will agree to take less than the debt amount and forgive the borrower without foreclosure proceedings.

In housing data provider CoreLogic’s most recent Cash and Distressed Sales Update published last month, the firm reports short sales made up 2.6 percent of total home sales in the U.S. in October 2016. Combined with real estate-owned sales, or those sold by the lender after a foreclosure has occurred, distressed sales made up 7.7 percent of all sales, the lowest share since October 2007. This is well below the January 2009 peak, when distressed sales made up 32.4 percent of all home sales, according to CoreLogic.

[Read: Distressed Property: A Clean Play for Investors?]

Negative equity doesn’t guarantee a home will list as a short sale. Homes that do may even see enough interest from buyers that offers take the property out of short sale territory, fully paying off all liens with the final sale price.

In today’s post-recession marketplace where short sales aren’t as common, banks owning the first lien on a property typically have more leverage than they did with those taking place as recently as five or six years ago.

Nathan Bangs, a Realtor and certified distressed property expert for Keller Williams Realty in Tampa Bay, Florida, says many buyers interested in short sales first think about the great deal they’ll get, overlooking the complicated steps required to complete a short sale.

“They hear ‘short sale,’ and they hear ‘fire sale,’” Bangs says.

A short sale can be a great best-case scenario for all parties involved, but not every buyer is a good candidate. If you’re considering purchasing a home as a short sale, make sure you have these four things:

Time. The most obvious difference between a short sale and a traditional transaction is the amount of time it takes to get third-party approval from all lenders involved.

Once you make an offer on a short sale, you have to wait for the primary lien holder to receive financial details of the seller's hardship, assign a negotiator and notify you of additional lien holders on the property, who will in turn assign their own negotiators for you to discuss the deal and payouts. Along the way you'll be required to provide updated financial information, with each step taking about 30 to 60 days. Bangs says the process in the current market takes five to six months – and during the recession he told buyers to be prepared to wait a full year.

“If you happen to fall in love with a home that happens to be a short sale and you have time, it’s OK to write up an offer,” Bangs says. “If you’re short on time, … if you’re adamant that you need a home in the next 30, 60, 90 days, then we need to uncheck the box ‘search for short sales’ and just focus on traditional sales.”

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Cash. You may not have to be an all-cash buyer, but be prepared for your lender to push back against the idea of financing a short sale purchase. Plus, your offer has to be enticing enough that the lender holding the lien wants to consider it.

Min Alexander is the senior vice president of real estate services for marketplace and transaction solutions provider Altisource, which facilitates short sales on its online real estate marketplace Hubzu. She says any buyer should have a strong offer on the table, at least with a large down payment, if not an all-cash offering.

“What type of down payment can they present to demonstrate to the lender that this offer should be approved because it’s a solid offer with a low risk of fallout?” Alexander asks.

A buyer seeking financing is more likely to get approval on a short sale with 25 to 40 percent down, says Steve Jacobson, a real estate agent specializing in short sales and owner of the Steve Jacobson Group in Denver.

More cash. On top of a big down payment, be ready to put up even more cash than your initial offer. The primary lien holder typically will not agree to pay off any secondary or tertiary lien holders in full, which often include secondary mortgages, outstanding homeowners association fees or even unpaid bills for improvements and repairs made to the home by the homeowner. If you want approval on the sale, you’ll typically have to negotiate with these lien holders.

“These have to be satisfied before the lender can approve because it will impact the final proceeds that will come out of the sale,” Alexander says.

That’s not to mention the repairs needed on a property. Alexander notes that a short sale, in many cases, will be in better condition than a foreclosure at auction or REO sale because someone likely occupied the property recently. But you should expect at least some deferred maintenance.

“The buyer is at a big disadvantage if there’s repairs needed, and that’s probably at least two-thirds of short sales,” Jacobson says.

[See: The Best Apps for House Hunting.]

Other options. When considering purchasing a short sale, your best option is to also watch for other types of listings. Bangs says buyers looking exclusively for short sale properties have bought into the myth that a short sale is a good deal purely because it’s a short sale.

While a short sale could have once been a great option for a real estate investor looking to flip the home for a profit, Jacobson says home valuations have increased enough that the difference between the purchase price and what they’ll be able to sell it for after renovations doesn’t typically yield much revenue. “The returns have gotten skinnied down a bunch,” he says.

For that reason, investors and homebuyers looking for a big return on investment should keep an eye out for a good deal on a fixer-upper in all sale types – whether it’s a short sale, foreclosure auction or traditional listing.

Corrected on Feb. 17, 2017: A previous version of this story incorrectly stated Min Alexander’s title.

Tags: real estate, housing, housing market, home prices, existing home sales, pending home sales, investing, mortgages, debt, recession


Devon Thorsby is the Real Estate editor at U.S. News & World Report, where she writes consumer-focused articles about the homebuying and selling process, home improvement, tenant rights and the state of the housing market.

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 dthorsby@usnews.com.

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