Buying a short-sale home: Process, risks, and benefits

Short sale homes can sell at lower prices, creating great deals and instant equity for new home buyers.

These transactions are also complex. Short sales have to clear multiple hurdles to close. And properties typically sell as-is, creating more buyer risk.

Before making an offer on a short sale home, it's best to take a few minutes to learn about the process. 

What is a short sale home?

A short sale occurs when a homeowner sells a property for less than the outstanding mortgage balance remaining on the home's loan. The mortgage lender agrees to accept proceeds that fall "short" of what they're owed—hence the name short sale.

For the home seller, a short sale is a way to avoid foreclosure. For the home buyer, a short sale can offer a great deal on a new home. Short sales also appeal to real estate investors since they can create more return on investment. 

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Why would a lender agree to a short sale?

Ideally, every home's value will always exceed its current mortgage balance, but not every real estate transaction works out like this.

A recently financed home can develop negative equity, also known as "being underwater," when property values in the area decline. Likewise, if a home falls into a state of disrepair, its market value may fall below its mortgage balance.

Most of the time, the homeowner can wait this out. Property values tend to increase in the long term even if they fall during the short term. As the homeowner keeps making mortgage payments, the balance due on the loan also decreases.

But what happens if the homeowner can't afford the payments or needs to sell for another reason? Such borrowers could be facing foreclosure. Foreclosures cost lenders money so some will agree to a short sale instead.

When a home qualifies for short sale

Not every borrower can qualify for a short sale. First, the home's value must be less than the homeowner's payoff amount. Lenders typically conduct property evaluations using recent comparable sales to determine market-supported pricing.

Second, the homeowner must demonstrate genuine financial hardship, proving they lack sufficient income or assets to continue making mortgage payments. Sellers often provide hardship letters or pay stubs as evidence they cannot catch up on payments and avoid foreclosure.

Short sale vs. foreclosure: key differences

The primary distinction between a short sale and foreclosure involves who controls the process:

Short Sale

• Homeowner initiates the process
• Seller remains in charge of marketing and showing
• Lender approves or rejects offers
• Less damage to seller's credit score
• Faster path to homeownership eligibility

Foreclosure

• Lender initiates after homeowner defaults
• Lender takes possession and controls sale
• No seller involvement in offers
• Severe credit score impact
• 3 to 7 year waiting periods before getting a new mortgage

Homeowners who complete short sales can often purchase another home through FHA programs much sooner than those who experience foreclosure. This makes short sales an attractive alternative for sellers facing financial difficulties.

How to buy short sale homes

Now that you know what creates short sale properties, it's time to consider whether buying one is the right plan for you.

Here are some short sale buying steps:

1. Get preapproved for a mortgage

Mortgage preapproval shows your financial readiness to sellers and their lenders alike. This step demonstrates you're a serious buyer with verified financing.

Cash offers may still receive priority consideration, but preapproval letters show you're already prepared to come up with financing to buy the home as quickly as possible. 

Better's preapproval process takes as little as 3 minutes with no impact on your credit score, giving you a competitive advantage in short sale negotiations.

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2. Find short sale listings and work with an agent

It's best to partner with a real estate agent who is experienced specifically in short sales. These professionals identify suitable properties, check titles, determine foreclosure notice status, and research outstanding lender amounts.

This kind of expertise can save a lot of headaches later in the purchase process.

3. Research liens and property condition

Title searches show who else has claims to the property. A title search is an essential step for buying any home, but it's especially important with short sales.

Schedule a thorough home inspection to look for dangerous and expensive issues like termites, mold, or structural damage that could undermine your investment.

4. Make a realistic offer

A short sale can be a great deal, but don't expect a steal. Make an offer that's close to the home's market value. Underpricing remains the primary reason banks reject short sale offers.

Lenders aim to recoup maximum losses, so lowball offers typically receive no response. Research comparable sales to support your pricing strategy. (Your real estate agent can help with this.)

5. Submit a complete offer package

Your documentation must include:

• Purchase contract signed by both the seller and the buyer
• Substantial earnest money deposit
• Preapproval letter
• Comparable sales supporting your price
• Proof of funds

Incomplete packages frequently face rejection, delaying an already lengthy process.

6. Wait for lender approval and close the deal

Expect 60 to 90 days for lender approval after submitting complete offers. Homes with multiple lienholders require more time since more lenders have to agree. Once approved, proceed to closing.

Market conditions can shift during extended approval periods, so maintain flexibility with terms and timing throughout the process.

Potential risks for short sale properties

Short sale purchases offer financial advantages, but you should understand the significant challenges before moving forward. These risks create realistic expectations for what can be a complex process.

Longer closing timelines

Short sales may require three to six months to complete, far exceeding traditional purchase timelines. Lender approvalalone often takes 60 to 90 days after you submit a complete offer. You'll need patience since lenders frequently review multiple offers simultaneously.

The extended timeline stems from multiple approval layers. Primary lenders must evaluate your offer, subordinate lienholders need time to review terms, and property conditions may change during the lengthy process.

Selling 'as-is' with limited disclosures

Short sale properties come without warranties and with minimal seller disclosures. This means the buyer has lessprotection. 

Sellers experiencing financial distress may have deferred maintenance, creating a long list of necessary repairs for the new buyer to complete. Without a proper inspection, foundation problems, plumbing issues, or electrical concerns could surface later, impacting your investment significantly.

Multiple parties complicate approval

Beyond the seller, all lienholders must approve your transaction. Primary mortgage lenders, subordinate mortgages, taxing authorities, and other creditors each have different priorities. Getting all these parties to agree, especially when their financial interests conflict, can be a challenge.

The primary lender might accept your offer, but a second mortgage holder might not like it. Any stakeholder can nix the deal.

Higher likelihood of deal failure

Since they take months to negotiate, short sales can start to feel like moving targets. Deals can fall apart because the sellermade other plans after all or because a subordinate lien holder would have to take a big loss. 

Market conditions can also shift during the approval process, affecting property values and lender willingness to accept your offer.

Hidden repair and legal complications

Without thorough inspections, you risk discovering substantial repair needs post-purchase. Legal complications like undisclosed tax liens, boundary disputes, or title issues may emerge later. Asking thorough questions before buying helps, but some problems remain invisible until you own the property.

Consider these potential costs when evaluating whether the purchase price justifies the risks involved.

Smart strategies to succeed with buying short sale homes

Short sale success demands strategic planning and knowledge. These proven strategies can significantly increase your chances when pursuing these unique properties.

Work with an experienced agent

Partner with a real estate agent who specializes in short sales. These professionals understand the intricate approval process and can research property values, liens, and potential issues before you submit an offer. They provide essential guidance through the often lengthy short sale vs. foreclosure timeline.

Your agent should be able to:

• Identify legitimate short sale opportunities
• Verify lender approval status
• Research comparable sales data
• Handle complex lender communications

Prepare your documentation package

Gather these essential documents before viewing properties:

• Mortgage preapproval letter: Shows lenders you're financially qualified
• Proof of funds: Bank statements or equity line documentation
• Substantial earnest money: Demonstrates serious intent
• Recent comparable sales data: Supports your offer price

Complete documentation expedites the process and demonstrates your seriousness to lenders evaluating multiple offers simultaneously.

Submit competitive offers with minimal contingencies

Lenders reject lowball offers. Price your offers near fair market value and limit contingencies that could delay closing. Cash offers receive priority consideration, but substantial down payments also strengthen financed offers.

Consider offering to pay the seller's closing costs. This sweetens your proposal without affecting the lender's net proceeds.

Maintain flexibility throughout the process

Short sale homes sell "as-is," so expect necessary repairs discovered during inspection. Budget for potential renovation costs upfront rather than trying to negotiate credits later.

Patience proves essential as multiple lienholders evaluate your offer. Be prepared for timeline changes, additional documentation requests, and potential counter-negotiations.

Is buying a short sale home for you?

A short sale purchase can work well for buyers who:

• Have a plan for home repairs: Buyers with experience doing their own home repair work often excel in the short sale process
• Don't mind a little uncertainty: Offers take time and may not yield an answer. The best short sale property buyersunderstand their offer may not succeed.
• Have financing already in place: Arranging financing removes one of the variables and helps put short sale buyersin the driver's seat

A short sale might not be a good fit for a buyer who:

• Needs a move-in ready home: Short sellers need out of their mortgage payments so they may. not have had the money to properly maintain the home
• Wants assurances about the property's condition: A home inspection helps a lot, but many short sales still come with a few mysteries built in
• Is looking for a rock bottom price: Contrary to what some people think, lenders don't usually agree to short salesat prices far below market value.

Buyers should always be honest about their risk tolerance and buying timeline before negotiating with homeowners and lenders. 

FAQs about short sale homes

What are the main risks of buying a short sale home?

The primary risk is wasting time. So many variables have to fall into place before lenders, sellers, and buyers all agree to the same terms. Some buyers never hear back on offers they spend hours putting together.

How long does the short sale process typically take?

In total, the short sale process usually takes three to six months to complete, with the lender approval phase often lasting 60 to 90 days after receiving a complete offer package.

What's the difference between a short sale and a foreclosure?

In a short sale, the homeowner initiates the process and remains in control of selling the property, while in foreclosure, the lender takes possession after the homeowner defaults. Short sales generally have less negative impact on the seller's credit score.

What percentage of short sale offers are typically approved?

Banks generally accept short sale offers about half the time, though approval rates can vary significantly.

How can I increase my chances of success when buying a short sale home?

To improve your chances, do the work upfront: Work with an experienced real estate agent, gather documents, arrange financing, make a competitive offer, and be prepared to wait.

Take control of your short sale decision

What is step 1 in a short sale? Finding out how much you can spend.

Unless you're a cash buyer who doesn't need a loan, a mortgage preapproval will provide a fast answer to this question.

Better's AI-driven mortgage approval process can show results within three minutes without a hard credit check.

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