What to know when buying a short sale home
Quick insights
- A short sale occurs when someone sells their home for less than what they owe on their mortgage.
- Purchasing a home through short sale can offer advantages such as a lower price point and less competition.
- Short sale purchases can come with additional risks such as a more complicated negotiation process and the home being sold as-is.
Are you the kind of person who’s always looking for a deal, or maybe a way through the back door? If so, a short sale may help you buy a home for a lower price than through a traditional sale. However, buying a property that’s being listed as a short sale comes with potential challenges for homebuyers.
Understanding what a short sale is—and when it does and doesn’t make sense to buy a home offered through this type of transaction—can help you make the right decision..
What is a short sale in real estate?
A short sale occurs when someone sells their home for less than what they owe on their mortgage. This can be a sign that the seller has been unable to make their mortgage payments and is facing financial hardship. If the lender approves the transaction, a short sale can allow the homeowner to avoid a foreclosure on their credit report. The homeowner also won’t have to face the emotional and legal issues of being evicted.
At the same time, a lender may be able to recoup all or part of the loan without having to go through the legal processes of taking possession of the home and having to resell it. Instead, once the homeowner has short sold the home, the mortgage lender can collect the money from the sale. They can then choose to forgive the remaining debt or file a deficiency judgment in court to collect the remaining balance that’s owed.
While not an ideal solution, a short sale is usually a better option for both the seller and the lender than going through foreclosure.
What are the benefits of buying a home through a short sale?
Buying a home through a short sale can be complicated, but there are some potential benefits for homebuyers.
Lower price
Purchasing a short sale home doesn’t always mean the sale price will be less than it’s currently worth, but it may make a seller more motivated to sell quickly. This means sellers could be less likely to stand firm on the asking price.
Less competition
Because short sales can be more complicated than most home purchases, there will likely be fewer buyers, even in a competitive market. This means you may be able to buy a home without getting into a bidding war with other buyers.
More options than buying foreclosed homes
While short sales may have complications, they can be more flexible than buying a foreclosed home. With a short sale, you can schedule a home inspection before you buy. This can help you walk away if the home has expensive problems that the seller didn’t disclose.
What are the risks of buying a short sale home?
While buying a home through a short sale may seem like a good deal, it can also come with additional risks and complications.
More parties involved
When you buy a home, you usually need to negotiate with the seller and agree to mortgage terms with your lender. When you buy a home through a short sale, you need to negotiate with the seller, their lender, your lender and any other lienholders on the property. This can complicate the short sale process and add to the time it takes to complete the sale.
Sold as-is
In most cases, a short sale home is sold as-is, meaning the seller won’t make any repairs and may not be required to disclose certain issues. If the seller has faced financial difficulties, it’s likely they haven’t been able to invest in maintenance and repairs, which could result in hidden problems that you might inherit when purchasing the home.
Increased financial risk
In addition to the quality of the home, a homeowner dealing with financial issues may owe money to other parties with a lien or other legal claim on the property. This could mean dealing with local and federal tax authorities, contractors, and other parties with ownership claims. This can add to the financial burden of owning the home, even after you’ve signed the closing documents.
How to buy a short sale home
If you’re interested in buying a home through a short sale, here’s an overview of how to go about it. Just remember to consult with an experienced real estate professional.
1. Get preapproved for a mortgage
Getting preapproved for a mortgage and presenting your financing to the seller and lender can help prove your financial capabilities and expedite the process. Inform your lender that you may be looking at short sales.
2. Seek out short sales in your desired area
You can find applicable homes using a qualified short sale home agent or real estate agent, searching online or looking through local public courthouse files.
3. Do your research
Assess the quality of the property and get a sense of how much you’ll need to fix up. Make sure to estimate the costs of repairs so you know what you’re getting yourself into.
4. Sort out liens and claims on the property
Before buying, consider requesting a title search and researching any outstanding liens, tax liens or claims of ownership on the home. Tying up loose ends can allow you to move forward quickly once the sale is official.
You’ll may also want to check the occupancy of the property to make sure there aren’t any renters or other residents who plan to stay.
5. Submit an offer
Whether it’s a short sale application, the seller's paperwork or your financing plans, make sure you gather all the materials you need to submit with your offer. A lawyer or real estate agent may be able to assist you.
6. Close on the property
Once the seller, buyer and lender are aligned, you can officially sign the papers, transfer the title and close on the property. Congratulations on becoming a new homeowner!
Does a short sale hurt your credit?
As a buyer, a short sale shouldn’t affect your credit directly. However, if there are liens or other problems with the property that aren’t resolved, it may have a long-term effect on your finances.
In summary
Buying a short sale home has a few more steps than going the traditional route, but it can come with certain perks. As a buyer, you may be able to get a home for less than its appraised value.
While buying a short sale home is a unique way of doing real estate, it but can be worth the team effort and compromise for all parties in the end. Whether you’re interested in buying a home through a short sale, or simply buying a home, get preapproved for a mortgage today to get started.
