Short sales can provide an excellent opportunity for potential homebuyers to score a good deal. If you’re in the market to buy a short-sale home, you’ll need to prepare for a lengthy closing process and steel yourself to jump through some hoops not generally associated with traditional sales. And if you’re a would-be short sale buyer, you’ll also need to arm yourself with the knowledge of how to find short sales near you.
If you’re considering this type of home purchase, here’s our expert-backed explainer on what is a short sale, what are the potential pros and cons of buying one, and how to find short sale listings in your area.
What is a short sale?
A short sale occurs when a homeowner owes more on their house than it’s currently worth, but nonetheless needs to sell. It can happen when the homeowner bought the house at the top of the market and then the market takes a hit.
The Great Recession is a prime example of this scenario, and it created plenty of short sales. “People had done 100% financing on their homes,” says Jessica Wallace, a top-selling agent based in the Santa Cruz, California area, so they had zero equity when “the market dropped 10%.”
Another reason a homeowner might need to sell in a short sale is if they overextended themselves with home equity loans or lines of credit.
In order for this type of sale to go through, the seller will need to convince their lender to take less than the house is worth (in other words, to come up “short” on the sale). Lenders are incentivized to do this — if the house is worth less than the borrower paid, and the borrower truly has no way of making payments — in order to avoid the process of foreclosing, which is also costly.
Why would I want to consider buying a short-sale home?
The main reason to buy a short sale home? You could get a great bargain.
For instance, let’s say you’re buying from a homeowner who bought at the top of the market… and you were fortunate to come along when the market takes a major dip.
As well, there’s less competition from other buyers for these listings. And unlike with a foreclosure (through which you also might end up getting a bargain), you’ll be able to walk through a short sale home before making an offer.
You can also get any inspections on the property that you like, including before making the offer, if the seller agrees. And in the end, a short sale is likely to be in better shape than an actual foreclosed home.
What are some of the drawbacks to buying a short sale?
Short sale homes are usually sold as-is. And lenders may not want to pay all the fees that are normally part of the seller’s closing costs to save themselves some money because they’re already taking a loss.
“The only reason you’d want to buy a short sale is you’re going to get a good price on it,” says Wallace.
“Because in a short sale, you’re not going to be getting repairs that need to be done on the property by either the homeowner who was losing money and doesn’t have any to put into the house, or by the bank who will be losing money as well. It’s definitely a buyer-beware situation.”
Plus, buying a short sale could seriously test your patience: The whole process could stretch a long time, because you’re waiting for a response from not an individual, but from the bank or lender.
“A short sale is short on money, but very long on time,” Wallace explains “I’ve seen it take as long as a year. You’re going to be waiting a long time, and if you have your heart set on a property, you can be very disappointed.”
That’s because even if the homeowner has approved the offer, “the lender can come back six months later and say, ‘No, we will not accept this price.’ So you’re going to be waiting a long time — and you might never get approval.”
OK, I think I’m interested. Where can I find short sale homes?
If you’re in the market to buy a short sale near you, first find yourself a buyer’s agent. “You want to connect with a local real estate agent that is well established and knows the area,” Wallace says. “They are the ones who know about short sales and can let you know.”
Many brokerages provide lists of short sales to people who have told the brokerage they’re interested, so ask your agent if their brokerage offers a service like this. Also talk to your agent about setting you up with MLS access so you can search for short sale homes in your area.
You can search for short sales directly through the MLS, which lists them, sometimes flagged directly. You can often tell a short sale by looking at the listing descriptions. They might say “short sale” outright — or if not, they might include other revealing language like “subject to bank approval,” “notice of default”, “headed for auction,” or other giveaways about the status.
Another way to find short sales is through an agent who specializes in short sales: These are listing agents who represent lenders, and they usually are listing homes in bulk. They’ll probably have an SFR (short sales and foreclosure resource) certification from the National Association of Realtors. (But still, you’ll probably want your own buyer’s agent to represent you and protect your interests if you find your short sale this way.)
You can also find short sales directly through the courthouse. At the city or county clerk’s office, you can see lists of people in loan default — also known as pre-foreclosure. This is the step before foreclosure, and there’s a period usually of about six months after a homeowner’s last missed mortgage payment before the bank will actually foreclose.
Wallace notes this is merely a way to track homes that may become short sales — but far from a guarantee that they will. “Most of the time, they find a way to make mortgage payments,” she says. “But it’s an indication of who’s having trouble paying the mortgage, and there’s going to be a lot of those right now,” she adds, given the coronavirus pandemic and associated economic crisis.
If you have old-school sensibilities, you might have luck finding short sales through the newspaper. Scan your local real estate section and see what you might find. Or, you can peruse classifieds digital style, on Craigslist. Do a local search under “real estate for sale” and search the term “short sale” or “foreclosure.”
Similarly, you can use classifieds in the reverse: to post an ad announcing your search. You can announce your interest in purchasing a short sale home on community bulletin boards, appropriate social media groups, and other digital and real-life spaces.
You can use your networking chops to search for short sales, too. Perhaps there’s a local real estate investor club in your area that you could join. Investors are your competition for these homes, but they’re also looking specifically for rentals or fix-and-flips, so they might be a good source for homes that don’t fit their buy boxes — but fit yours perfectly.
You can also look to online platforms: Some platforms (such as Zillow) have short sale-specific searches for buyers.
Although the Great Recession about a decade ago created many short sales, it remains to be seen whether the current economic crisis will do the same. “None of us can predict the future,” Wallace says, explaining that we should know more in six months to a year. But if prices dip 10% or more, she says, then it’s time to “really start opening your eyes and looking for short sales.”
Header Image Source: (Max Böttinger / Unsplash)