What is a short sale?

Jumbo shrimp. Act naturally. An open secret. Seriously funny. These are just a few of my favorite oxymorons. But since becoming a homeowner (and real estate writer) I’ve added one more to my list: short sale.

The term “short sale” implies something quick and easy and/or more affordable than a traditional home sale. And while sometimes that’s the case, more often than not “short sale” is an oxymoron. It can take longer, and it can get pricey, even though the idea is to sell a home for less than the outstanding mortgage remaining on it. That’s not to say it’s not a worthwhile option as you begin your home search, but keep reading to understand the definition, pros, cons, how to proceed, and the typical timeline of a short sale.

What is a short sale?

A short sale happens when a home value falls significantly—according to Investopedia, that means the value drops by 20 percent or more. Homeowners typically start the process of the short sale themselves, but they’ll always need approval from their lender. If the lender approves homeowners for a short sale, it means the lender is willing to accept a lower payoff and wipe the existing mortgage. 

From a homeowner’s perspective, short sales can be an attractive way to get out of a mortgage: It’s less detrimental to a homeowner’s credit score, and it’s not the same as foreclosure (although it’s sometimes known as pre-foreclosure). In foreclosure, banks seize a property after a homeowner has failed to make payments and is delinquent on their mortgage. In a short sale, homeowners may not be delinquent at all but are opting to sell since a home value has fallen or they paid too much for it in the first place. Often, short sale homeowners owe more than the home is worth, hence initiating a short sale.

The Pros

The price. Buyers look for short sales first and foremost because they can be significantly cheaper. In fact, if you’re browsing for homes and see a too-good-to-be-true price, it could be a short sale you’ve stumbled upon. Still, these ridiculously low prices don’t mean that’s what you’ll pay. Usually, in an extremely low-priced short sale, you’ll be contending with multiple offers. In the end, you’ll likely need to offer something closer to market value to seal the deal.

The Cons

We’ve already revealed one: multiple offers. While they might give you a ballpark idea, a listing agent isn’t required to tell you how many other offers there are, or how high or how low they are. According to The Balance, a short sale with multiple offers typically includes one lower than the listing price, an offer at price, a slightly higher offer, and a significantly higher offer. If you’re serious about a short sale, you should be prepared to offer something above the list price.

Short sales also mean that even though a homeowner initiated the process, it’s a bank that’s ultimately in charge. Banks can take their sweet time responding to offers, so short sales are a test in patience and stamina for buyers. And if the investor is a federal agency like FHA? Plan to factor in additional delays for responses and approvals. You’ll also want to consider that since the sale is coming from banks or federal agencies, there’s not as much negotiating power when it comes to things like closing costs. A buyer purchasing a short sale home can all but guarantee they’ll pay higher closing costs.

Another con of a short sale is the timeline, due in large part to a whole lot of paperwork. Short sales can take a full year to process compared with the usual 30-day (sometimes less) timeline. Some of the specific paperwork includes what’s known as a “short sale package,” outlined here from Keller-Williams. The short sale package comes from the seller, meaning the would-be buyer may have to wait for the seller to get this information together. Ask if the listing agent already has a short sale package together from the seller—this includes important documentation like tax returns, bank statements, and a hardship letter outlining why they need to make the short sale. The lender will require all this information in order to move forward with the sale, and since it comes from the seller, be forewarned: It’s out of your hands.

Money talks. I want to buy a short sale! How do I proceed?

You’ll need to have patience, be prepared to make an offer above the list price, and work with a real estate agent who’s well-versed in short sales. Before choosing an agent, ask about their short sale experience. Ask if they know what lenders are easier to work with and which ones aren’t. Ask how many short sales they’ve handled before.

How long does a typical short sale take?

As previously mentioned, it can drag on for longer than a year, but the average time is more palatable: about 4 months. Some agents may instate a deadline to help spur banks to take action on approving an offer, but whether or not that deadline is actually met will depend on the bank or institution behind the short sale.

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