What Is a Short Sale & What Happens When You Sell Short?

Short sales can be a polarizing topic, with people claiming it’s either good or bad. In reality, a short sale can actually be a good thing – but it's definitely not a simple process compared to regular homebuying. Let's break it down and see if a short sale is the right move for you.

What Is a Short Sale?

Let’s shed some light on a real estate situation that can be a lifesaver for homeowners who are struggling financially. A short sale is when a property is sold for less than what is owed on the mortgage, but the lender agrees to it because foreclosure could be on the horizon. It's basically when the homeowners and lender come to a compromise to avoid a complete financial catastrophe. This is far from ideal, but it can be a way to salvage something from a tough spot.

The Difference Between a Short Sale and Foreclosure

Short sales aren’t as scary as they sound, I promise. So, unlike foreclosure where the homeowner loses possession of the home, with a short sale they still get to keep their property. They work with an experienced real estate agent to list their home. Once a buyer comes along, the sale process is pretty similar to a regular one, except for one catch. The lender has to approve every single detail of the sale. But don't worry, with the right team and a little patience, a successful short sale can benefit both the seller and the buyer.

By contrast, in a foreclosure, the lender swoops in and takes ownership, booting out the homeowner. The lender then scrambles to sell the property with the intention of getting back as much money as they can. It's a sad and difficult situation. Imagine being forced to pack up your belongings and hit the road, all because you couldn't make those mortgage payments.

Is a Short Sale Good for the Buyer?

If you're considering buying a short-sale home or one that's been foreclosed on, listen up. While the lender may prefer a short sale due to less legal fees and more money recovered, a short sale may actually be the better option for the buyer too. Not only is the home likely to be in better shape, but you also have a greater chance of scoring a sweet deal on the price. Plus, the process typically operates like a traditional home sale, making it a win-win for everyone involved.

On the flip side, buying a short sale is not a quick process and is definitely longer than the usual 30 days. When you buy the home, it's as-is, meaning no negotiating to fix any problems before purchasing. So, be prepared to possibly pay for repairs yourself. Plus, the lender may not approve the sale, so keep in mind you could be waiting weeks for an answer. Make sure to offer a solid deal to improve your chances.

How Does a Short Sale Work?

Now, you might think buying a home is already a big enough headache, but trust me, short sales take things to a whole new level. The lender has a say in pretty much every aspect of the process, making it more complicated than your average home-buying journey. So, let me break it down for you. Here are the steps you'll typically need to go through in a short sale:

1. The homeowner will speak with their real estate agent and their lender about doing a short sale.

2. The homeowner will provide their lender with a short sale package, as well as proof that they can no longer make payments on their mortgage and do not have assets that would allow them to catch up on payments.

3. The home will be listed by the real estate agent.

4. When there is an interested buyer, a sales contract will be drawn up based on the buyer’s offer.

5. The sales contract will be sent to the lender for approval. Even if the seller and buyer are in agreement, the sale cannot go through without the lender’s approval. The lender may accept or reject the offer outright, or they may reject the offer but provide the terms under which they will accept the offer.

6. The buyer can accept the lender’s terms or counteroffer. Negotiations can continue until an agreement is reached or the buyer or lender walks away.

7. If the sales contract is approved, the sale of the property closes, and the buyer takes possession. At this time, the lender gets all the money from the sale, and the seller is released from their obligation to pay off their mortgage.

Food for Thought

Although short-sale homes are less common today due to increased housing values and limited inventory, you never know when they might make a comeback. As a budget-conscious homebuyer, learn the ins and outs of short sales and how they could be your ticket to snagging a dream home at a bargain price.

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