Brokers and investors, and even newbie real estate agents, discover foreclosures all the time—but as a new agent, it’ll serve you well in the future to consider short sales. But what is a short sale in real estate? This type of transaction isn’t as easy to find as a foreclosure, but the reward is often greater. Below, you’ll learn more about real estate short sales. This information is invaluable in helping you decide if these are something you should put more effort into finding.
What Are Real Estate Short Sales?
So, what is a short sale in real estate? Real estate short sales are often a precursor to foreclosure. A short sale in real estate can help a homeowner facing foreclosure avoid this drastic mark against their credit history, which often precludes them from obtaining a future mortgage. Real estate short sales involve selling a home that’s on its way towards foreclosure for less than what the homeowner still owes on their mortgage.
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The decision to resort to a real estate short sale often happens when both the homeowner and the lending institution agree that selling the property for less than what’s owed is better than forcing the homeowner into default status. However, the one drawback of a real estate short sale is that both parties agree to let go with a loss—the homeowner loses any equity they’ve built along with the loss of the home, and the lender loses out on the owed amount.
What is a Real Estate Short Sale vs. a Foreclosure?
Homeowners sometimes find themselves in the unfortunate predicament of being unable to make their mortgage payments. For instance, the homeowner might have fallen behind in payments or, for reasons that are sometimes out of their control, own a home that’s worth less than what they currently owe on their mortgage. Sometimes, the situation is even more dire—the homeowner is not only behind, but their home has also lost value over the years. Two options available to those in this dilemma are real estate short sales and foreclosures. Choosing between these options, however, is no easy feat. Both options are governed by varying timelines and can have very different outcomes.
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Benefits and Drawbacks of Taking On Short Sale Properties
There are pros and cons to any deal in real estate. It’s no different for real estate short sales. But the advantages and disadvantages of short sales in real estate depend on the vantage point. For instance, the pros and cons for a homeowner are different from the pros and cons of the property’s potential buyer.
From the seller’s vantage point, a benefit is avoiding foreclosure. At the same time, a definite disadvantage is the loss of all mortgage payments already paid plus any equity the home may have garnered over the years.
But what is a short sale in real estate from the eyes of a buyer? What pros and cons are they looking at?
Pros of buying a short sale in real estate include:
- Condition of the home: In many foreclosures, homeowners are prisoners of their losses, leading to property destruction. However, in a short sale transaction, a homeowner understands that the sale can help their financial position by keeping them out of foreclosure and avoiding a bad mark against their credit—it’s in the homeowner’s best interests to put forth a property worthy of a quick sale.
- Time to the actual transfer of ownership: Compared to some real estate transactions, a short sale—despite its name—can be a rather lengthy process. In fact, when it comes to what is a short sale in real estate, the term actually refers to the fact that both the homeowner and the lender are “coming up short”. The homeowner is losing the home, and all moneys already paid, while the lender is losing out on the balance of the original sale. While the time to close a short sale in real estate is relatively slow and could be considered a disadvantage, this is actually a benefit for the buyer. It provides time to prepare finances, get any repair estimates, and find contractors to perform any necessary work while waiting for the short sale approval.
- Discounted pricing: Sure, foreclosures typically come with deep discounts, but they usually require much more work. A short sale lets a buyer purchase a property for much less than the typical going rate with a relatively straightforward process. A short sale in real estate does take longer, but the buyer has the added benefit of significantly lower fees and closing costs.
- Emotions run high: Here’s another benefit that seems, at first glance, to be a disadvantage. Both short sales and foreclosures involve strong emotions and personal situations. Buyers of short sales can be glad that they can help out a distressed homeowner. Being able to help someone avoid foreclosure and maintain their credit rating is definitely worth celebrating.
With all good things, though, there can be disadvantages depending on which side you’re on. When it comes to buying short sales in real estate, the most common disadvantages include:
- Once a short sale is on the market, it’s extremely competitive.
- Banks can take anywhere from three months to an entire year before approving a short sale, which requires a lot of patience.
- Short sale buyers need to be prepared for a lengthy wait while also remaining vigilant through the many hurdles a bank can put in place—after all, the lender doesn’t want to be stuck short selling a property for a second time.
- Short sale real estate deals can fall through due to how long it takes for approval—either the lender or the buyer can call off a deal if any details are changed, such as the lender countering the original offer.
For a new real estate agent, short sales shouldn’t be considered a primary source of reliable income.
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What is a Short Sale in Real Estate—The Process
The short sale process begins for the seller when they opt for the short sale instead of a foreclosure. Once the seller has chosen to short sale, they may already have several offers. On the other hand, the short sale process for the buyer doesn’t begin until they’ve actually struck a deal with a homeowner. It’s important to note that since homeowners must pay taxes on their debt, they may not accept an offer that’s too low.
Once the above is in swing, the buyer and seller will present their deal to the lender and begin the wait for approval. Remember, the waiting period can last anywhere from three months to an entire year. After the lender has had the opportunity to appraise the property, they will either approve or deny the deal. If approved, the buyer can also have an inspection or appraisal performed before final short sale approval.
What is a Short Sale in Real Estate: Where to Find a Short Sale Listing
The best way for buyers to locate real estate short sales is to search for properties facing foreclosure. Once a home is listed as “in foreclosure”, the owners have more reason to accept a short sale deal. Resources that offer insight into potential short sale deals include:
- Other agents or brokers
- The MLS
- Lender websites
- Auctions
- Foreclosure companies
A short sale in real estate is a process that shouldn’t be taken lightly by any party. In fact, buyers should note this isn’t a typical real estate transaction, mostly because homeowners’ emotions are running high. These opportunities are, in essence, playing on the unfortunate circumstances of a homeowner. But, when short sales are successful, it often is to the benefit of all involved.
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