You may have heard a little bit about short sales — enough to know that this type of real estate listing can present some opportunities to get a good deal. And that’s true! But the potential for upside comes with plenty of caveats buyers need to know about, too.
Yes, a short sale can be a great chance for a buyer to get a good deal on a home, and that added bang for the buck might allow you to buy more house, or to buy in a better neighborhood than you might get with a traditional home sale in your budget.
But while short sales offer potential opportunities, they come with plenty of potential pitfalls as well. So hunting for this type of home can be tricky business requiring patience, finesse, an experienced real estate agent on your side — and all the knowledge you can possibly gather to inform the process.
To help you gain that nuanced know-how, here are 13 expert-backed tips to follow to make sure your short sale-buying experience goes as well as possible.
1. Know if a short sale is the best option for you
If you’re considering a distressed home, weigh the option of a short sale against the possibility of buying a foreclosure or bank-owned home.
A short sale happens when the seller owes more on a property than it’s worth, and the lender agrees to sell the home at a loss — coming up “short” on the sale.
Generally speaking, short sales will be in better condition because they are likely to be occupied given that the homeowner still owns the property.
These properties may not be fully updated, but they aren’t likely to have some of the problems common among foreclosures that have been sitting vacant (such as vandalism or theft). Correspondingly, short sales will also likely cost a bit more than the other options. And they’ll take longer, too.
“Foreclosed properties go a lot quicker because they’ve already gone through the foreclosure process,” explains Andrew Monaghan, a Phoenix-based agent with 20 years experience, who has sold 77% more single-family homes than the average agent in the area. Whereas, he notes, short sales are much more entangled.
2. Know where to find them
If you’re searching for a short sale, first find a local buyer’s agent who knows both the area and the business of short sales as much as possible. Many brokerages provide lists of short sales for interested buyers, so ask your agent to provide it.
Short sales are generally available directly through the MLS. You can also find short sales through the newspaper; by posting an ad announcing your search on community bulletin boards or social media; and generally by networking in your community. Some online platforms also have search filters for short sales.
Do note that in a strong housing market, short sales will be much rarer and harder to find, because it’s far less likely for a homeowner to end up underwater.
3. Read between the lines to understand a listing that interests you
Sometimes short sale listings are flagged explicitly as such. If not, some language in the listing might provide clues that they are in fact short sales, such as “subject to bank approval,” “notice of default,” or “headed for auction.”
The city or county clerk’s office has lists of people in loan default, or pre-foreclosure, but note that there’s a period of typically about six months after a homeowner’s last missed mortgage payment before the bank will actually foreclose. So these homes may become short sales, but it’s not a sure thing, and whether it sells as a short sale or a pre-foreclosure depends on the home value and the loan amount.
4. Not every agent understands short sales
These are specialized listings, and working with an agent who isn’t familiar with short sales can cost you in both time and money.
The National Association of Realtors offers a short sales and foreclosure resource certification that distinguishes the experts.
5. Certain government loans might not work for short sales
In general, getting a loan for a short sale works much the same way as getting any other home loan. That said, FHA and VA loans require homes to be in certain conditions, which a short sale might not meet.
One tip: You can try to get preapproved or secure a loan with the seller’s lender in an attempt to expedite the short sale buying process and make sure you’re in the clear.
6. Be ready to deal with a third party
The seller may approve your offer, but the seller’s lender has to sign off on the deal, too — which means you’ll need that lender’s approval.
The lender is aware of the market value of the property, and it won’t sign off on a larger loss than is absolutely necessary. That means you might get a deal on the house, but you aren’t likely to save that much money.
7. Get an inspection
Short sales are sold in as-is condition, so you aren’t going to get the seller to make repairs. That said, you want to know what you’re getting into even if you can’t ask the seller to fix it — so definitely get a home inspection.
It’s a good idea to decide in advance what repairs you are and are not willing to inherit, and the inspection will help you determine how much work and expense this home would require if you were to become its owner.
8. Pay attention to the appraisals
The process of buying a short sale involves two appraisals: one when your own lender funds your loan, and another one for the seller’s lender to make sure they’re not losing too much money. If the appraisal for your lender comes in under the home’s offer price, you may need to come up with the additional funds or call it a day and walk away.
On the other hand, if it comes in high, this is a circumstance where the seller’s lender might ask for more money or perhaps even cancel the deal.
9. Cultivate your patience
As we’ve discussed, you’ll be waiting for a bank to get back to you, which is not simple or fast. Even if the seller approves your offer quickly, the lender must approve your offer next — and that can take many months of waiting.
During that time, the market might strengthen, and that can be good news for your potential equity if the sale finally closes at your offer price. But it can also be an opportunity cost if you lose the house — or other, better living spaces — while you wait.
10. Lock in your rate
Because the timeline for a short sale can be long, you’ll want to remain in close communication with your lender during this time. And ideally, you’ll want to get your interest rate locked in for as long as possible.
Some lenders will let you lock in your interest rate for up to 90 days. Therefore, if interest rates go up while you wait, you’ll keep your own rate from rising along with it.
You might also try to arrange a float-down option so that if mortgage rates fall below your locked-in rate, you can get that even better rate when the time comes.
11. Be ready to pay more in closing costs
You might be asked to bring more to the table as the buyer in closing costs than you would ordinarily, and that’s a detail you should factor into your budget.
Short sale buyers likely have to pay the full buyer closing costs, whereas you can often negotiate with the seller to have them cover some closing costs in a traditional sale. Though in a strong seller’s market, sellers have little incentive to cover a buyer’s closing costs.
The bank probably isn’t going to pay your closing costs because they’re trying to recoup as much on the loan as possible. (However, it might if doing so seems to support the interest of avoiding foreclosure.)
12. Title insurance is important
This will protect you from any unknown claims, liens, or heirs in case the title review misses something. It’s especially important for short sales, where there are more unknowns.
“Maybe there’s a second loan and maybe a third. Maybe there’s a solar lease,” Monaghan explains. “Title insurance can protect the borrower against a number of things like that.”
“It’s extremely important. You want to make sure that any and all liens on the property, or people who have a claim to the title on the property, are satisfied before you close.”
13. Have the strength to walk away
Short sale purchases are typically long, drawn-out, and complex processes. So buyers should come prepared with major endurance as well as nerves of steel to stay in the game for the long haul. And if it’s not working the way you hoped? That’s OK too: Know when to cut your ties.
“There’s just a lot more that can go wrong than people think,” Monaghan says. So manage your expectations — and be prepared to walk away if that great-sounding deal starts to look like anything but.
Header Image Source: (Zoran Pucarevic / Shutterstock)