Real estate investors look for short sales to acquire homes for lower prices, often with excellent deals. In this article, we will explain short sales in detail, share strategies for finding these deals, and offer some tips for potential buyers, such as loan modification and making sure a website has up-to-date information.
What is a Short Sale?
A short sale is a real estate transaction where the property owner sells their property for less than the amount they owe on their mortgage. Short sales require lender approval, as the lender must agree to accept less than the full mortgage amount.
The proceeds from the sale go directly to the lender to partially cover the remaining balance. In some cases, the lender forgives the remaining debt. In other cases, they pursue a deficiency judgment to recover the remaining loan balance.
If you don’t purchase the property with cash, you must also be approved for a loan. That means you’ll need to provide proof of your cash flow, such as your credit history, bank statements, tax returns, etc., before browsing the classified ads.
Why Do Short Sales Happen?
Short sales are relatively common in the following situations:
- Financial hardship – The most common reason is financial distress due to job loss, medical expenses, or reduced income. A homeowner with trouble paying for the mortgage may ease their financial situation by selling.
- Avoiding foreclosure – The seller can avoid the damage to their credit report and other financial impacts of foreclosure. Note that when the mortgage lender agrees to discount a mortgage loan, it also reduces the company’s costs, as the foreclosure process is long and costly.
- Relocation or life change – Life events like a job transfer, divorce, or family needs may require homeowners to pursue a short sale. This especially applies to situations where the home’s market value has dropped below the mortgage balance.
Benefits of Buying a Short Sale Property
While the circumstances of a short sale often mean the seller is in distress, they may also put the buyer in an advantageous position, as the buyer can offer the relief and quick sale that the seller needs.
Potential for a Lower Purchase Price
Short sales allow buyers to purchase properties at prices below market value. With the seller rushing to avoid foreclosure and the bank trying to minimize loss, the seller will usually ask the listing agent to set a lower price to attract buyers.
Motivated Sellers
Homeowners are often highly motivated to sell their homes quickly, as they’re under immense personal or financial pressure. They may be unable to afford their mortgage payments and are pursuing the short sale to avoid foreclosure, or they may be looking for financial relief. This potentially means higher flexibility and willingness to negotiate.
Challenges of Buying Short Sale Properties
Buying short sale homes comes with its own set of challenges. They include the length of the process, the potential for multiple offers, and having to accept and purchase the property as-is.
Lengthy Process and Approval Time
According to the National Association of Realtors, short sales require approval from the main lender and any other lien holder. For most properties, the short sale process can take up to two months per lender. If there’s a second mortgage, you may wait another two months.
In some cases, even when there is bank approval, the institution may change the contract terms you’ve already negotiated and cause you to lose time.
Potential for Multiple Offers and Competition
A solid short-sale home can attract many prospective buyers, especially real estate investors. While it can mean less competition in some situations, it’s also possible to run into highly sought-after homes and enter exhausting bidding wars. Listing agents try to get more money if they can to get closer to what the seller owes on the house.
Property Condition and Repairs
Usually, the potential buyer of a short-sale property must purchase it as-is. Since the most common reason for sale is debt, the financially distressed homeowner generally doesn’t have the resources to repair, renovate, or deep clean the home.
In other words, the home may not be move-in ready or have serious issues, and many buyers don’t have the time to deal with these. Although the house is sold for a good price, it may cost more to repair the home.
How to Find Short Sale Homes
There are several ways to find short-sale homes, including real estate agents, online listings, lenders, and foreclosure auctions. Regardless of the market conditions, it’s best to use several sources at once to avoid missing out on opportunities.
Work with a Real Estate Agent
One of the most straightforward paths is seeking local real estate agents specializing in short sales. Working with them has several advantages:
- Access to a multiple listing service – Agents specializing in short sales have access to MLS databases, and they can quickly identify homes that fit your budget and your needs.
- Negotiation expertise – Your real estate agent can negotiate with the lender and potentially get you an even lower price.
- Navigating the short sale process – An experienced agent will understand legal and lender requirements and may be able to speed up the process.
Search Online Real Estate Portals
Online platforms can help you find and compare real estate investing opportunities.
Your first stop should be popular real estate websites such as Zillow, Redfin, and Realtor.com. In the search bar, you can find short sale listings by using keywords such as “short sale” or “pre-foreclosure.” Filters can help you narrow down the search by pricing, location, and property type.
Contact Lenders and Banks
Another way to find short-sale deals is to contact lenders and banks directly. Many institutions have lists of distressed properties for sale, and whole departments dedicated to the category.
You can ask for two types of departments. The first are REO (Real Estate Owned) Departments, which mainly deal with foreclosed properties but often have info about short sales, too. The second type is Loss Mitigation Departments, which handle short sales and other alternatives to foreclosure.
Attend Foreclosure Auctions
Occasionally, you can discover short-sale properties at foreclosure auctions. While auctions typically involve foreclosed homes, they may also feature homes in the pre-foreclosure stage, where short sales are still an option.
Look for short sales in pre-auction listings, and try to contact the seller or lender before the auction or speak to lenders after unsuccessful auctions.
Tips When Buying a Short Sale Home
Compared to traditional real estate transactions, short sales are generally more complex. Here are some things you should know before getting into the process.
Get Pre-Approved for a Mortgage
Mortgage pre-approval shows lenders and sellers that you’re a serious buyer and have the means to complete the sale. In a short sale transaction, the seller and the lender are usually hurrying to close, so you should have all your documentation ready.
Make a Strong Offer
Research the price before you make an offer. Start by looking at the local housing market and the recently sold homes, then find out how big the seller’s mortgage debt is. The lender will have the final say, and they will prefer to stay as close to the market price as possible.
Be Patient and Persistent
Approvals and negotiations can take a rather long time. If you’re interested in the property, prepare to be patient and persistent. However, if the seller hasn’t submitted a full short sale package yet, and you’re in a hurry, consider looking into other properties to avoid wasting time.
Seek Legal Advice
Deficiency judgments, title issues, liens, and tax implications are some of the legal complexities that may arise in a short sale. Consider consulting an attorney experienced in this type of transaction and maybe even a tax professional who can give you insight into the process.
Cash Home Buyers and Short Sales
In some situations, homeowners will look to cash home buyers as an alternative to short sales. Cash home buyers are faster, simpler, and don’t involve many negotiations, paperwork, and legal complexities.
A Faster Alternative
Instead of complicated short-sale transactions, property owners who have to sell their homes fast can seek out a cash home buyer. Cash buyers are real estate companies that can provide an easy transaction, purchase the property as-is, and often close the deal within weeks, if not days.
Benefits for Homeowners in Preforeclosure
Selling to a cash home buyer lets you avoid the long process associated with buyers’ mortgage approvals. Instead, you can get a good deal on your home immediately, avoid foreclosure, and potentially save your credit.
The purchase is also direct, meaning no real estate agents are involved, no showings, no negotiations with multiple buyers, and no need to repair or clean any part of your home.
A-List Properties can help you enjoy a fast, easy sale. We don’t impose certain restrictions or stress over square footage. Instead, we buy your home as-is with cash. For a free quote, call or text (972) 526-7042 or write to us on our contact page.
Zach Shelley
Zach Shelley is a seasoned real estate investor with a diverse network spanning across the nation. As the founder of his own real estate venture, Zach is committed to offering innovative solutions to homeowners facing various real estate challenges.. Through his dedication and strategic approach, Zach continues to make a significant impact in the real estate industry, providing homeowners with alternative pathways to navigate their property transactions.
