What is a Short Sale and How to Do it in Real Estate
- May 26, 2021
- 6 min read
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Buying a home can be a long and tedious process, and it can be tough to find a piece of property that’s affordable for your budget. However, many enterprising homebuyers occasionally find excellent deals by purchasing short-selling properties.
Short sales are distinct from foreclosures but still occur when a current homeowner can’t make mortgage payments any longer. Homebuyers looking for potential deals can take advantage of short sales and oftentimes purchase property for significantly lower prices than they would otherwise.
Let’s break down short sales in more detail and explore how you can purchase a short-selling property.
This stands in contrast to most home sales, as the majority of homeowners attempt to get at least as much as they owe on their current mortgage so they can buy a new property immediately after selling their current house.
With a short sale, the original mortgage’s lender gets all the proceeds for the sale. In exchange, they forgive the remaining mortgage difference for their home’s owners or impose a deficiency judgment. In the latter case, the original borrower still has to pay what is leftover.
Even though this might not seem very beneficial for the lender, it’s often preferred compared to foreclosures. In some ways, short sales allow homeowners and mortgage lenders to get out of a tough financial situation by taking a smaller loss than they would both suffer otherwise.
In the best short sale scenarios, buyers can profit greatly from buying short-selling homes (house flippers, in particular, look for short-selling homes).
Short sales can have many benefits for both buyers and sellers. Buyers, for instance, benefit from:
- Discounted prices on homes. Remember, short sales revolve around selling properties as quickly as possible, which often means buyers can purchase them for less than their true value
- A less competitive market overall. Since lenders are involved in the short sale process, these transactions are significantly more complicated than average home sales. So there’s less competition from other buyers, again giving a short sale buyer more power in the negotiations
Home sellers can also benefit from short sales in certain ways, including:
- Avoiding foreclosure, which can have a number of negative effects on a seller’s credit score and other aspects (more on this below)
- Savings from various fees. During a short sale, sellers don’t always have to pay for agents’ commissions and other fees, as lenders take care of these costs
- Removal of most debt, as most of a seller’s debt will be paid off by the buyer of their property
- Fast debt forgiveness. In many cases, sellers aren’t held accountable for paying off any debt that may remain after a short sale (although not always – it’s highly dependent on the short sale deal in question)
- Faster housing market reentry, which enables homeowners who lose their home to potentially get a new one faster than they would with a foreclosure
Many homeowners who can’t keep up with their mortgage payments instead look into foreclosure. There are some similarities between short sales and foreclosures; for example, both sales only occur when a homeowner can’t make mortgage payments (and can’t refinance) and is losing their home as a result.
But there are a number of major differences as well. For example, during a short sale, the house seller has to submit a financial package and get approval from their lender to sell the property for less than what they owe on it. In other words, it’s a voluntary process.
In contrast, foreclosures are not voluntary. These are legal actions taken by lenders to seize property after a homeowner has fallen too far behind on monthly mortgage payments.
Foreclosures are typically more damaging to a homeowner’s FICO (credit) score, which may make it more difficult for the homeowner to buy a home in the future.
But foreclosures can also be expensive for the lender, which often inspires lenders to opt for attractive short sale packages instead of pushing for foreclosure. Homeowners usually prefer short sales as well, as the lack of a big credit hit may allow them to get a mortgage shortly after losing their first home.
If you want to make a short sale to take advantage of the low prices and fast turnaround, you can do so by following these broad steps.
First, get approved for financing (if applicable). Even though short sale homes are cheaper than average, they’ll still cost hundreds of thousands of dollars. So you may need to get financing to pay for the home outright.
Preapproval is all but necessary, as lenders for any short-selling homes will want to make sure that new buyers can fully purchase the property. Lenders may be more suspicious of buyers who don’t have preapproval – remember that lenders are coming out of a bad deal and will not want to take a risk on another shaky buyer.
Acquire a real estate agent to find appropriate short-selling homes. Short sale homes are rarer than regular home sales, so enlisting the help of a real estate agent can help you find appropriate properties more quickly.
You can do a little searching yourself, as well, such as by searching through pre-foreclosure property listings online or searching through public records via your local county court.
Be sure to do tons of research. Get as much information as you can about a prospective property and review comparable sales in the area to make sure you’re getting a good quote on the home’s price. Again, a real estate agent can be an excellent resource for verifying a home’s value.
Real estate agents, unlike you, have access to the MLS or Multiple Listing Service, which is a centralized database of homes currently on the market and homes that were recently sold.
During your research, try to find out exactly how much the seller owes their lender. Double-check that there aren’t any extra existing liens on the home as well.
Once you’ve found a good property in which to make a short sale purchase, make an offer to the homeowner/lender. When you make your offer, use the research you did earlier extensively.
Try not to undercut the lender too much. The lender may be trying to cut their losses, but they won’t accept a deal that’s too low for their liking. If you want your offer to be accepted, try to make it as close to the fair market value of the home as you can.
If your offer is accepted, don’t close the deal outright. You won’t be able to negotiate lower purchase prices if you detect any problems with the property; do an inspection beforehand. This step is particularly important for house flippers looking for a great deal.
If the lender accepts the short sale and the home looks good, you can close on the property and get the ball rolling on the ownership transfer. Make sure that the lienholders and lenders are willing to release the collateral.
Additionally, make sure that the seller provides key documentation. These documents are necessary for the sale to fully close:
- Hardship letters explaining the financial burdens of the seller and why they can’t continue to make mortgage payments
- List of liens (if applicable)
- Proof of income and assets from the seller. The homeowner has to prove that they don’t have the funds to pay off the remaining debt for the short sale go through
- A comparative market analysis. The lender will need to see this to prove that the seller owes more than the house is currently worth
If you can follow all of these steps, you’ll purchase a short-sold home and potentially get an excellent deal for house flipping or for living in yourself!
As you can see, short sales can be excellent opportunities for real estate house flippers, landlords, or just people looking for an affordable home to call their own. But it’s important that you do lots of research before making a short sale purchase, as these deals are not as regulated as traditional transactions and come with several key caveats.
But with the right preparation – and the assistance of a good real estate agent – you’ll undoubtedly be able to find at least a few good short-selling homes to check out.
In the meantime, consider getting preapproved for the loans you’ll need to make the purchase in the first place. Seek Capital can help with that. Contact us today and see how we can help you!
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