What Is A Short Sale In Real Estate?

Opportunist homebuyers or down-on-their like homeowners may be interested in a short sale. However, most people do not know what a short sale house means. This post will help both homebuyers and homeowners better understand real estate short sales. Think of this post as the short sale explained from top to bottom.

Short Sale: Definition And Explanation

The short sale definition is the sale of a home for less than mortgage balance on the home. The owner of the home will sell the home for less than what the owner owes on the home.

The purpose of a short sale is to aid the homeowner-seller with avoiding a foreclosure. Short sales typically occur when the home seller can no longer afford the home with foreclosure looming near. Additionally, a house short sale must be approved by the lender with the outstanding mortgage.

But there is much more to it than just that to understand what is a short sale on a house.

How Does A Short Sale Work?

Understanding what is the process of a short sale will help both a homeowner or a potential homebuyer is the best idea. Overall, the short sale process is a cooperative process between the lender and the homeowner. The hopeful outcome is that the lender receives more from the home sale than it would in a foreclosure preceding and that the homeowner let’s the home go while avoiding a foreclosure.

The process is lengthy, but it can be done. Here are the steps of the home short sale process:

• Agreement from lender: First, the homeowner must work with the lender and communicate his or her inability to continue making payments on the mortgage. Upon exhausting any programs offered by the lender, the lender can agree to allow the seller to sell the home in a short sale.
• Marketing the home for sale: The next step is for the homeowner to begin marketing the home for sale. The best way to do this is with the help of a real estate agent.
• Accepting an offer: The homeowner will receive an offer, which he or she might want to accept. However, the lender must be involved at each step of the home sale and give its approval, too. This can cause the home sale process to be lengthy, uncertain, and unattractive to many homebuyers.
• Closing: If the accepted offer makes it to closing, the Seller will sell the home, and the lender will release the mortgage despite the sale proceeds being less than the remaining mortgage balance. The home seller will walk away from the closing table with no proceeds.

Short Sale vs Foreclosure

Short sales and foreclosures are different. A short sale involves the homeowner and lender cooperating to sell the home for less than the current mortgage balance. The remaining balance is forgiven. Additionally, a short sale is a sale of the property to a homebuyer.

On the other hand, a foreclosure is a legal process resulting in the taking back of a property by the lender from the homeowner due to the homeowner defaulting on the mortgage. The difference between short sale vs foreclosure is a foreclosure is a taking whereas a short sale is a home sale.

How To Buy A Short Sale Home?

Homebuyers who can adapt to the short sale process can successfully purchase a home in a short sale. Here are the steps you should expect to take when buying a short sale.

Step 1: Get Approved For Financing

The first step of the short sale process for buyers wanting to purchase a short sale is to get pre-approved for a mortgage. I would not take any homebuyer down the short sale home purchase path unless the buyer was approved for a conventional loan. Therefore, start the process by getting pre-approved and learning what mortgage types are available to you.

Step 2: Get A Real Estate Agent And Find A Home

Homebuyers wanting to buy a short sale should work with a real estate agent. A real estate agent can help you find short sales. Additionally, a real estate agent with short sale experience will help you navigate the purchase process and set up realistic expectations for you.

Step 3: Do Your Research

You will want to get familiar with any property you are considering making an offer on. This includes the surrounding area, current overall condition of the home, and repairs likely needing to be made soon after purchasing the home. Your real estate agent can help you better understand the home’s current value and future value once any distressed characteristics are corrected.

Step 4: Make An Offer

Once you know what you need to know about the property it is time to make an offer. Typically, not every question will be answered when you make an offer. Your purchase offer likely carries numerous contingencies including having the property inspected, analysis of the title and liens on the home, and getting the lender’s final approval.

Step 5: Have The Home Inspected

I would strongly encourage anyone buying a short sale home to have the property inspected. Think about it with me. If the homeowner doesn’t have the money to make the payments on the loan why would you think the homeowner is properly maintaining the home. Short sales are more likely to be in distressed condition compared to other homes. Get a home inspection when buying a short sale.

Step 6: Close On The Property

The final step in the process to buy a short sale home is closing. At closing, the homeowner and lender will sell the property to you. The mortgage that is being bought out will be removed from the title on the home. At closing you will become the owner of the property.

Benefits Of A Short Sale

A short sale benefits the homeowner and the person buying a short sale home in different ways. Lets review the benefits of a short sale for both the buyer and seller.

Short Sale Benefits For Buyers

Homebuyers can often purchase a short sale home at a price below the home’s fair market value. This is due to the fact many homebuyers will not have the patience to deal with a short sale home purchase. Also, often a short sale home is in a slight to moderate distressed state. This, too, gives a homebuyer the opportunity to develop quick equity in the home.

Short Sale Benefits For Sellers

The key benefit for a homeowner selling a home in a short sale is avoiding a mortgage foreclosure. Foreclosures are a major negative event on a credit report. A foreclosure on your record can make it difficult to purchase another home in the future.

Additionally, foreclosure is a long, drawn out process. Some mortgages even allow the lender to come after the homeowner for more money once the home is sold as a foreclosure if that amount was below the lender’s mortgaged amount and expenses.

Disadvantages Of A Short Sale

Short sales are cumbersome and difficult home sales. There are drawbacks for both the seller and the buyer which you should be aware of.

Short Sale Drawbacks For Buyers

A short sale requires the agreement of both the seller and the mortgage company who currently has a loan on the property. Therefore, you need both parties to agree. At steps of the sale process you will be waiting on the lender to provide its approval. So, if you want to know how long does a short sale take I would answer, I don’t know. It can take weeks or months. Really, there is no certainty, and every instance is different.

There can be more risk when buying a short sale. Also, the home will likely be in a slight to moderately distressed condition once purchased. Homeowners behind on their mortgage probably don’t have the money to keep up with repairs and maintenance. Or, the current owner might have lost interest in maintaining the home once it sets in that the owner will be selling the home and getting nothing.

Short Sale Drawbacks For Sellers

The primary drawback for a seller in a short sale is uncertainty. You are relying on the lender to cooperate as it said it would. However, in reality the lender can take days or weeks to make decisions to allow the short sale to proceed. All of this creates uncertainty for the home seller.

Also, though a short sale can allow you to avoid a foreclosure it can still appear as a negative credit history event on your credit report. It is unfortunate, but it is true.

Short Sale Buyer Tips

Homebuyers who want to know how to buy or how to find short sale homes can benefit from these tips. These short sale buying tips will help you begin making progress in the process of finding and buying a short sale.

• How to find short sale homes: Most of the national and regional real estate websites do not have the ability to allow consumers to filter for short sales. However, many real estate agents do. Work with a real estate agent with short sale experience in your area.
• Have patience: Once you find the short sale you want to buy you need to be patient. Getting the lender’s approval at each step can take weeks or months. If you are a homebuyer that needs a place to live by a certain date, getting wrapped up in a short sale is a bad idea.
• Get a home inspection: Sellers behind on their mortgage are probably behind on their home maintenance, too. Don’t expect a lender or seller to be too willing to fix anything either.
• Offer low: Don’t be afraid to offer a little low. You might be surprised what the lender will take. And, if your offer is rejected, offer a bit more and see what happens.

Conclusion

A short sale is when a home seller cooperates with their lender to sell the home to a homebuyer for less than the current mortgage payoff amount. A short sale is an opportunity for a seller to avoid the foreclosure process.

Short sales can take a long time. Also, a homebuyer should expect the home to be in a slightly to moderately distressed condition. Homebuyers can find themselves in an ahead of schedule equity position by buying a short sale home.

The Quadwalls Real Estate Team home has experience helping people buy and sell distressed homes including short sales. If you are interested in buying a short sale in Northwest Indiana contact us. Or, if you need to sell your home we can help with that, too. We offer a full-feature home selling service with low real estate commission fees.