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What Is a Short Sale in Real Estate?

This is what you need to know before investing in short sales.


Mar 02, 2021 by Tara Mastroeni
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Many new investors have heard stories of others who have made it big by buying short sale property, leaving them wondering "What is a short sale in real estate, exactly?" We'll tell you what a short sale is, how the process works, and what you should know before buying one of these types of properties.

What is a short sale transaction in real estate?

In the real estate industry, a short sale transaction occurs when the lender agrees to let the homeowner sell the property for less than what's owed on the mortgage. In this case, the mortgage lender agrees to accept less than the remaining mortgage balance in order to avoid having to go through foreclosure proceedings, which can often be costly and time-consuming.

As an investor, going through the short sale process will be very different than dealing with a foreclosure. For the most part, a real estate short sale follows the same pattern as a traditional sale. However, rather than the seller having the ultimate say in who ends up buying the home, the seller often has to ask for lender approval before accepting any offers. As the buyer, you'll ultimately have to negotiate with the lender in a short sale transaction.

Meanwhile, in a foreclosure, the homeowner has no say in what occurs. In this case, the lender has the right to sell the right to sell the property to the highest bidder at a foreclosure auction. Once that happens, the former homeowner is eventually evicted.

What are the pros and cons of buying short sale as a real estate investor?

Pros

  • You'll likely get a deal on the home: Since the mortgage servicer is agreeing to sell the short sale home for less than is owed on the mortgage loan, you can often get these properties for less than fair market value. As an investor, getting a deal on the purchase price can be a great way to improve your bottom line.
  • It's more like a traditional real estate transaction than a foreclosure: Buying a short sale home is typically thought to be easier than buying a home at foreclosure auction because it functions more like a traditional real estate transaction. In this case, you can work with a real estate professional, and you have the opportunity to read through the short sale package before deciding to submit an offer.

Cons

  • Short sale negotiations can take a long time: The short sale process can often take a long time to complete. Often, an offer needs to go through multiple rounds of lender approval before it can officially be accepted. Then, throughout the course of the transaction, there's usually quite a bit of red tape that needs to be handled.
  • You'll be buying the home in "as-is condition": Since the lender is already accepting a loss on the mortgage balance, they're likely not going to be willing to negotiate with the homebuyer any further. Usually, this means accepting the home in as-is condition and, sometimes, it can also mean accepting financial responsibility for any title problems, including a deficiency judgment or lien.
  • Short sale approval isn't guaranteed: Even if your short sale offer is accepted, this is one situation where you don't want to count on owning the property until you actually have the keys in hand. As mentioned, offers usually need to go through multiple rounds of lender approval before the mortgage company can officially accept a loss. So short sales often fall through at the last minute.

Tips for investing in short sales

Work with a short sale specialist

If your goal is to focus on short sale properties, unless you have your own real estate license, you'll want to work with a real estate agent. Put simply, the most reliable way to find a short sale listing is through the MLS, which only real estate professionals can access.

However, in this instance, you don't just want to work with any real estate broker. Instead, you'll want to focus on finding a short sale specialist. Short sales tend to be more complicated than your traditional real estate transaction, so it's a good idea to have someone in your corner familiar with the process.

Read the short sale package carefully

Each short sale will come with a packet of information, known as the "short sale package." This package is put together by the mortgage lender and outlines all the important fine print in the transaction. With that in mind, read this document extremely carefully. By signing it and submitting an offer on the short sale home, you're essentially agreeing to all the terms within.

Budget for added costs

When buying a short sale, it's important to budget for additional costs beyond the purchase price. While the terms of every short sale are different, it's not uncommon for the lender to require the potential buyer to agree to pay the seller's portion of the closing costs.

In addition, you may need the budget for repairs to the home. In this case, if a homeowner cannot keep up with their mortgage payment, it's unlikely they have the money for routine maintenance and upkeep. As a result, short sale homes are often sold in disrepair.

The bottom line

Buying short sale property can be a great investment strategy. However, it's also one where you absolutely need to do your due diligence. Like a foreclosure sale, buying one of these homes could mean paying extra fees and facing the prospect of title problems. To that end, you're make sure you do your research before submitting any offers. When in doubt, consult with a real estate agent who has experience working with short sales in your area.

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