A short sale is the sale of a real estate property for which the lender is willing to accept less than the amount still owed on the mortgage.
For a sale to be considered a short sale, these two things must be true:
- The homeowner must be so far behind on payments that they can’t catch up.
- The housing market must have gone down so much that the house is worth less than the remaining balance on the mortgage.
In most cases, the lender (and the homeowner) will try a short sale process in order to avoid foreclosure. Overall, there are a lot of misunderstandings around short sales. But one common misconception is that lenders just want to be rid of the property and will move quickly to get as much money back as possible.
In reality, the lender will take their time to recover as much of their loss as they can. Here’s the thing: Just because a property is listed as a short sale does not mean the lender has to accept your offer, even if the seller accepts it.
This is what makes the short sale process so tricky.
How Does a Short Sale Work?
If you’re wondering what the standard steps are that typically happen as part of the short sale process, look no further.
Step 1: The homeowner starts by talking to their lender and a real estate agent about the likelihood of selling their house via short sale. At this point, they may submit a short sale package to their lender. They’ll also have to prove to their lender that they’re no long capable of making their mortgage payments and have no assets that would allow them to catch up on payments.
Step 2: The homeowner works with a real estate agent to list the property. They’ll execute a sales contract for the purchase of the property once a buyer is interested. However, this contract is subject to the lender’s approval and is not final until then—even if both the seller and the buyer agree on the terms.
Step 3: The lender reviews the contract and could then respond in a variety of ways. They could choose not to respond at all, they could reject the offer, they could reject the offer but outline which terms they would agree to, or they just might approve the offer.
Step 4: When the lender’s response is presented to the potential buyer, the contract will either stay the same or the buyer will choose to appease or reject the lender’s terms. So, at this point, the ball is in the buyer’s court!
Step 5: If the contract is approved, the short sale property closes and the home is transferred to the new buyer. The lender receives all proceeds from the sale of the property and releases the original homeowner from their mortgage loan—even though the full mortgage balance was not paid off by the proceeds.
How to Buy a Short Sale Property
If you’re considering buying a short sale property, here are some tips to keep in mind throughout the process.
- Do your research.
Before placing an offer on a short sale property, work with your real estate agent to do investigative work on the property. Your agent can check public records to see how much money the homeowner still owes on the mortgage. Between that and the comparable properties in the area, your agent should be able to give you good advice about making an offer.
- Understand the lender is calling the shots.
You may be working with the seller and their agent to submit an offer, but keep in mind that, ultimately, the lender’s in control of the short sale process.
- Always do a home inspection.
You may be tempted to waive the inspection when buying a short sale to speed up the process, but that would be a big mistake. You should always hire a professional home inspector to evaluate the home. Buying a house without a proper inspection can be disastrous.
- Partner with an expert real estate agent.
Whether you’re selling or buying in the short sale process, you need an expert real estate agent who has specific experience with short sale properties.
Because short sales are so complex, you’ll need a real estate agent you can trust to walk you through the process and answer any questions you have along the way.