Purchasing a home is expensive, and many homebuyers consider ways to lower their closing costs and find properties they can afford. Some homebuyers may consider bidding on short-sale properties. Typically, a short sale occurs when a homeowner suffers financial distress and falls behind on their mortgage payments. The mortgage lender may agree to let the homeowner sell their home for less than the remaining amount owed on the mortgage. If you’re interested in buying a short-sale property, it helps to know where to find this type of listing and how the process could differ from a typical home sale.
What is a short sale?
Property owners who fall behind on their mortgage payments receive a Notice of Default from their lender. The lender will work with the homeowner to find a way to settle their debt and either catch up on mortgage payments or find a way to sell the property. Homeowners may complete financial counseling or have their lender restructure their current mortgage. Those who are farther behind on their mortgage payments may decide to sell their property and settle their outstanding debt.
Also known as a pre-foreclosure sale, the term short sale refers to a home on the market that asks for less than the outstanding mortgage amount. For example, a homeowner may owe $150,000 on their mortgage, but they believe they can only sell the home for $125,000. A mortgage lender may accept the lower sales price as a settlement for the homeowner’s outstanding debt. The lender may also allow the short sale to take place, then look to settle any remaining amount owed on the mortgage with the original homeowner later.
Short sales also help homeowners by allowing them to sell their homes when they believe they cannot catch up on their mortgage payments. Lenders allow short sales because it quickly settles an owner’s outstanding debt and prevents foreclosure.
Short sales vs. foreclosures
Mortgage lenders can typically recoup more of their overdue amount by allowing a short sale instead of a foreclosure. Foreclosures are a lengthy and costly process for a mortgage lender, where they then acquire the home and must maintain the property. In a short sale, the original homeowner sells ownership to another homeowner, and the original lender receives most of the remaining balance due on the property.
However, both short sales and foreclosure sales share some characteristics. Short sales and foreclosures arise when homeowners fail to meet their mortgage obligations. These transactions carry additional risks for new buyers, as they may receive less information about the property than in a standard real estate transaction. The lower price makes up for some, but perhaps not all, of the increased risk.
How to find short sales in your area
From time to time, short sales may pop up in online real estate listings. Those unfamiliar with the process may shy away from homes offered in a short sale or foreclosure. Alternatively, savvy investors or buyers focused on homes selling at below-market prices may actively seek out properties offered at short sale using various sources.
The following are some suggested ways to find short-sale properties:
Real estate agents
Some real estate agents specialize in short-sale listings and provide their clients with a reliable source of information about distressed properties. Agents may develop relationships with mortgage lenders in their area and offer to find buyers when short sales occur. Interested buyers can search online for short-sale agents and ask them about getting short-sale listings as they become available.
Internet searches
Buyers can also search for short-sale properties online. Short-sale sites may provide the clearest and most concise information about a property, but buyers can also search general real estate listings if they know what to look for. Search terms such as “short sale” or “requires lender approval” can help to narrow down distressed properties within a specific geographic location or zip code. Many short-sale listings may also contain information about what type of financing the lender accepts and the current condition of the property when sold “as-is.”
Court or property records
Public records provide another source of information on potential short sales. The type of record to look for varies depending on the home’s location. States have either a judicial foreclosure process or a non-judicial foreclosure process. In New York, the judicial foreclosure process means lenders must file a lawsuit when a homeowner defaults. States permitting non-judicial foreclosures, like California and Texas, allow the process to occur outside of the court system. Still, lenders must process a notice of default according to state law.
Buyers should take note that finding a default notice in a court or property record search does not necessarily mean the owner wants to sell their home. The homeowner may pursue a series of options, including a short sale, to settle the matter.
Subscription databases or real estate wholesalers
Serious buyers or investors may utilize a paid subscription service or engage real estate wholesalers to help them find short sales. Online databases collect information on foreclosures or short-sale properties and then share listings with paid subscribers. Investors may also work with real estate wholesalers, who will locate distressed properties and place them under contract on behalf of the investors for an added fee. Typically, wholesalers look for investors able to pay cash for these properties.
Navigating the short sale purchase process
Short sales can benefit both sellers attempting to avoid foreclosure and buyers searching for a home below market price. Buyers may view short sales as a bargain, but they do carry added risk. The challenges involved in a short sale purchase can make the transaction more difficult to navigate or drag out the timeframe of the transaction. Homebuyers may encounter the following setbacks when purchasing a short sale.
Lack of seller motivation
Homeowners who fall behind on their mortgage payments likely do not wish to sell their property and are only doing so to settle their debt. Sellers may hold out on providing information to buyers and not let them easily view the home. Buyers, therefore, may not have all the information they need to know about a home.
Lender involvement
The mortgage bank or lender typically approves the sales price for a short sale. This adds an extra step to the home buying process and may limit the seller’s ability to negotiate with interested buyers.
Limited repair budget
Many short-sale properties have fallen into disrepair due to the current owners’ financial issues. This financial distress leaves little, or no, funding for repairs and maintenance. Buyers must budget needed repairs and renovations when making an offer, assuming the seller cannot assist. Buyers can still conduct a home inspection during closing but will not be able to present the seller with a list of items to repair. Instead, the inspection informs the buyer what they should immediately fix when they acquire the property.
Title issues
The seller’s financial distress may result in debtors placing liens on the house. These liens must be satisfied before settlement, and buyers may need to step up and cover the added costs. To learn how much the seller owes, buyers should pay for a separate title search and work to clear any issues before the closing date.
Settlement costs
Sellers or the mortgage lender may also request that buyers cover settlement expenses to get a deal done, such as a cost to obtain a use and occupancy agreement, unpaid HOA fees, or outstanding property taxes.
Financing a short sale
Buyers may also face difficulty obtaining financing for a short sale due to their lender’s perception of added risk related to this type of transaction. Buyers may need to move forward with a cash deal, a larger down payment, or an alternative form of financing.
Conclusion
Buyers with a strong understanding of short sales can confidently engage in this transaction. Investors, experienced homeowners and buyers, or buyers looking for a below-market purchase price can search for short sales once they understand the added risks. In any case, buyers should consult their real estate agents and mortgage lenders to learn how to protect themself and complete the transaction.
