When a homeowner can’t afford to stay in their home, selling it short is one way to get out from under their debt. Through the short sale process, the homeowner comes to an agreement with the lender to sell the property for less than the balance on the mortgage, an arrangement that can help avoid foreclosure, and one that typically spares the homeowner the difference in cost.
On the surface, a short sale might sound like a great deal for a would-be buyer who is better positioned to benefit from the seller’s tough spot. And it might very well be: It offers the new buyer the possibility of a great bargain.
But that’s far from a guarantee. This type of sale comes with plenty of challenges, including a drawn-out closing process and little room for negotiation with an as-is sale.
For a deeper dive, here’s our expert-backed list of pros and cons to weigh before searching for that short sale so you know exactly what you’re getting into.
Short sale pros
Why would a buyer want to deal with an as-is sale that might take longer? There are some advantages to purchasing a short sale.
1. Sellers are motivated to work with you
With short sales, sellers are motivated because they’re facing a short sale as a last hope of avoiding foreclosure. That means you as the potential new buyer will probably have an easier time negotiating with the seller compared with a seller who plans to get top-dollar in the traditional market.
2. You can get a bargain
You may be able to get the house for below fair-market value — obviously a big win for a buyer hoping to get a deal and the possibility of building equity fast.
3. You get more out of your budget
And because you’re likely to get a better deal, you can get more house for your budget, which means you might be able to buy a home in a neighborhood that you wouldn’t otherwise be able to afford. So short sales are often good opportunity generators for buyers.
Put simply, “You’ll be able to buy more, and get more bang for your buck,” explains Andrew Monaghan, a Phoenix-based agent with 20 years of experience who has sold 77% more single-family homes than the average agent in the area.
4. You have major equity potential
With a short sale — by definition — the seller owes more on the mortgage than the house is worth. And for that reason, the home in question is not likely to be renovated, updated, or otherwise readied for sale. That can net you a discount below comparable properties where the sellers are better positioned to make the house appealing for sale, and to squeeze every possible dollar out of it.
“You get an opportunity to build your equity through sweat equity when you get into the house,” Monaghan says.
Beyond that, you might even start building equity before you get the keys: “For instance, there’s the fact that if you get an offer accepted today and the market is still going up, you’ve got six to nine months, probably, before the entire process is over,” he says. “So, the buyer has got a gain of equity even in that period.”
5. Short sales are in better condition than foreclosures
While short sales may not be fully updated or readied for sale, they are likely to be in better condition than other distressed sales. That’s because they are often still occupied — after all, the homeowner currently owns the property, not the lender.
These owners might not have been able to make all recent repairs, but the homes probably haven’t been sitting vacant. So they haven’t been squatted, burglarized, vandalized, or flooded for weeks without anybody noticing — and the condition is probably OK.
6. You can get an inspection
Plus, you can get a short sale inspected, unlike you would when buying a foreclosed property at an auction. So if you are going the distressed route, a short sale feels like a less risky option, with more data points around the home’s condition available to the buyer.
7. There’s less competition
Further, there’s typically less competition for this type of listing. You don’t have to worry as much about other buyers swooping in and disrupting your deal, which can add a lot of stress with a traditional sale in a hot housing market.
“Some people just don’t want to get into it,” Monaghan explains. “They don’t want to have the emotional roller coaster.” And that’s good for you … if you’re up for it.
Short sale cons
Of course, there are also good reasons why some buyers should be wary of short sales.
1. You won’t save that much money
We’ve established that buying a short sale can be an opportunity to save some money on a home purchase.
But the reality is, you aren’t likely to save that much cash. That’s because the lender approving the short sale will usually conduct a detailed valuation to determine the property’s current fair market value before deciding whether to accept your offer, and it will likely only agree to a significant discount if the house isn’t updated or in the same condition as neighborhood comps.
2. Short sales can drag on forever
Because the lender is involved and must approve your offer after the seller does, a short sale takes much longer than a regular sale — it could be several months while you wait for the bank to respond to the offer.
It’s just not going to be a quick sale, and therefore it won’t be right for a potential buyer who needs to move in quickly. “A short sale is anything but short,” Monaghan explains.
3. Short sales are sold as-is
Again, these homes are purchased as-is. You can (and should) get an inspection, and include a contingency that says you can back out of the deal if the condition is really problematic. However, you won’t be able to negotiate repairs — you simply must take it or leave it.
4. You have little room to negotiate
With a short sale, you don’t have as much room to negotiate as a buyer — both in terms of price and concessions (asking the seller to pay closing costs). The bank is well aware of how much money they stand to lose on the deal, and that limits your wiggle room.
5. Not every agent handles short sales
Because these are specialized listings, not every agent can handle a short sale with the expertise, the finesse, the specific negotiations know-how — and the endurance — they require.
These sales are more complicated, with more players and more sign-offs, and you want to make sure you pick the right agent for the job. That’s going to be one specifically experienced with short sales.
6. Listings can be hard to find
These listings simply aren’t always easy to find. This type of sale comes about as the result of a specific homeowner circumstance, and that circumstance isn’t equally likely to happen everywhere (or at least not often everywhere).
You’re less likely to find them overall when the market is strong, whereas in the Great Recession — which was at its core driven by the housing market — they were available in abundance almost everywhere.
“At this moment in time in the market, there are very few short sales,” Monaghan explains. “Because the market is moving at such a level right now, there are very few homes that are underwater.” (He notes that this may change when moratoriums related to the coronavirus pandemic lift.)
Overall, there are many potential upsides to buying a short sale — and many potential pitfalls, too. So approach your house hunt with an open mind.
And know this, according to Monaghan: “This is a market for a subset of a buying population, but it’s not necessarily for everybody.”
Header Image Source: (Andy Dean Photography / Shutterstock)