What is a Short Sale in Real Estate? A Guide for Buyers and Sellers

A common real estate term you’ve probably seen, whether you’re buying or selling a home, is a “short sale.” A short sale home can be a good way to stretch your budget if you’re a buyer or let go of a home you can no longer afford if you’re a seller.

In this Redfin article, we’ll cover the basics of selling or buying a short sale home. Whether you’re looking at homes in Charlotte, NC, or need to sell your house in Philadelphia, PA, we’ll help you decide if a short sale is worth the extra time and effort.

Key takeaways

• A short sale happens when a homeowner sells for less than they owe on the mortgage.
• For sellers, a short sale has to be approved in advance by the lender.
• For buyers, a short sale can take up to a year, but you may get a good home for less.

What is a short sale?

A short sale happens when a homeowner sells their home for less than what is owed on the mortgage. The process has to be authorized by the mortgage lender. A short sale typically occurs when the current value of a home is lower than the outstanding balance on the loan, or the homeowner is at risk of foreclosure due to unpaid mortgage payments. 

For example, if a homeowner has an outstanding mortgage balance of $400,000 and the current market value of the home is $350,000, they would be short $50,000. That’s where the term ‘short sale’ comes from.

All proceeds from the sale go to the lender. It depends on the lender or bank whether the seller will owe additional debt repayment. 

Short sale vs foreclosure

Short sales and foreclosures are two processes that may happen when a person can no longer pay their mortgage. However, they have key differences:

Short sale

• The homeowner initiates the short sale by submitting financial information to their lender, who approves the short sale. Often, homeowners do this to avoid foreclosure.
• The owner will begin the home selling process with a real estate agent after their lender approves the short sale.
• Short sales negatively impact the owner’s credit score, but don’t prevent them from getting another mortgage. 

Foreclosure

• The lender seizes the property as a result of failure to pay the mortgage. There are often many attempts to rectify the situation before the foreclosure process begins. Typically, this is the last option for a homeowner. 
• The lender or bank takes possession of the property and sells it. 
• Foreclosures also negatively impact the owner’s credit score and often prevent them from getting another mortgage for some time. 

How to buy a short sale property 

There are several factors to consider when buying a short sale home. Here’s what to expect as a potential buyer:

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1. Prepare for a long timeline

Expect the entire short sale process to take up to a year from the time an offer is submitted to when you actually take possession of the home. Although it’s possible for a short sale to close in as little as a few weeks, it’s important to be realistic about the timeline.

2. Find an experienced real estate agent

Buying a short sale home requires help from a qualified real estate agent who understands all aspects of the process, including how a short sale works for the seller and the homebuyer. Experienced agents can navigate the complexities of dealing with lenders, accurately assess the property’s potential value, and manage buyer expectations regarding timelines and roadblocks. 

3. Submit a strong offer with comps

As a buyer, if you’ve viewed a short sale home you’d like to purchase, your agent will need to write an offer that’s presented to the seller’s mortgage lender. The offer letter must include a list of comparable sales. The lender will want to make sure the home sells for a price that’s close to market value, as they are usually losing money on the transaction. 

Once your agent has submitted your offer package to the bank, it can take up to 30 days for the bank to acknowledge receipt. A negotiator is assigned within the next 30 days, and in some cases, a second negotiator may be added to the file. 

4. Wait for lender approval 

The conventional homebuying process involves negotiations between the buyers’ agent and the home sellers. With a short sale, the lender has the final say in whether or not an offer to purchase is accepted. They’ll review your offer, assign a negotiator, and ultimately approve, reject, or counter your offer. This step can take 30 to 60+ days.

Pros and cons of buying a short sale house

There are a number of pros and cons to consider when buying a short sale. Let’s take a look at them:

Pros of buying a short sale

• Buy a great home for less: One of the biggest advantages of buying a short sale property is the potential of owning a great home for a lower price. Lenders or banks are often more interested in selling the home for market value than making a profit. 
• Less risk than buying a foreclosure: Typically, there’s less risk involved in buying a short sale than a foreclosure. Buyers can usually request a home inspection with a short sale, unlike a foreclosure, where banks don’t have to disclose information about the property. 
• Fewer competition with other buyers: Short sales often take a long time, so buyers looking to move quickly often aren’t interested in them. 

Cons of buying a short sale

• Long timeline: Due to the lender’s heavy involvement with the process, short sales often take months to a year to complete
• Property’s condition: The price may not be worth it if the homeowner has been unable to maintain the property, and the home requires major repairs. These properties are also usually sold as-is, so pre-listing repairs are often not completed. 
• Additional upfront work: Typically, the buyer may need to do additional work to understand the home’s value, checking for liens, and identifying any major structural issues with the home. Seth Williams, founder of REtipster, advises buyers to expect delays and, “Use that extra time to dig deep into property details, title issues, and inspection reports.”

How does a short sale work for the seller?

Each mortgage lender has their own short sale criteria. In general, lenders will consider allowing a short sale if:

• The market value of the home has dropped based on recently completed sales of comparable homes in the area.
• The homeowner is close to defaulting on their mortgage, and they have no assets that can be used to cover their mortgage payments.
• The homeowner has experienced a qualifying hardship that prevents them from paying the difference between the mortgage balance and the market value now or in the future.

Sellers typically need to attest that they have a qualifying hardship in the form of a letter that explains their circumstances. This letter may need to be an affidavit, provided with documents to verify the facts surrounding the reason for a short sale.

When it comes to navigating the short sale process, Daniel Apke, founder of Land Investing Online, advises, “For sellers, presenting a complete, well-documented short sale package to the lender can help expedite approval and improve the chances of a smooth closing.”

Pros and cons of a short sale for sellers

There are also pros and cons to having a short sale as a seller. Here’s what to consider:

Pros of a short sale for sellers

• Preventing foreclosure: One of the biggest benefits of a short sale is preventing the home from going into foreclosure. Foreclosure can lead to long-term impacts on credit score and the ability to gain another mortgage. 
• Potential debt payoff: When the buyer purchases the home, the seller’s debt may be forgiven. It depends on the lender whether the seller will owe additional money once the sale has gone through. 
• Ability to finance your next home: With a short sale, you have the ability to get an FHA loan as your next mortgage loan. 

Cons of a short sale for sellers

• No proceeds or room for negotiation: Since the seller owes money on the home, they won’t receive any of the proceeds from the sale. Additionally, they won’t be able to negotiate the sale price. 
• Credit score implications: Short sales can cause damage to the sellers’ credit score, although often much less damage than with a foreclosure.
• Delay in getting a mortgage: There’s often a waiting period, 2 to 7 years, before a seller can apply for a traditional mortgage. However, they can often qualify for an FHA loan. 
• Additional debt repayments: If the sale of the home doesn’t cover the debt the seller owes, the lender may sue the seller. This is called a deficiency judgment, but it’s not legal in all states. 

Is a short sale right for you?

Whether you’re looking to buy a short sale or need a short sale to sell your home, it comes down to your circumstances. As a buyer, if you have the time to wait for the short sale process to complete, it may be a good opportunity to buy a home at a lower price. As a seller, a short sale may be the right option for you to avoid foreclosure and be able to repay your debts. 

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