When it comes to large purchases – we all love a good discount. Purchasing a short sale home will definitely give you the savings you’re looking for, but these real estate transactions come with a complicated process and a bit more risk than the typical home. So, what is a short sale in real estate and is it worth it?

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What is a Short Sale?

A short sale is a home that has been priced below market value and is sold for less than what the seller owes on their mortgage. A short sale only occurs with permission from the lender when the home’s value is declined and the owner owes more than the home is worth. The lender will receive all of the proceeds from the sale and will either forgive the difference in what is owed or get a deficiency judgment that requires the original borrower to pay the difference.

While this seems like a less than ideal scenario for the lender, it is actually a safer alternative to a foreclosure. The short sale will allow for both the lender and seller to get out of the difficult situation by taking a loss rather than being foreclosed and dealing with the separate challenges that come with the foreclosure process. Since the lender is often taking a loss in a short sale transaction it is possible for the new buyer to profit off of the sale. However, before jumping into a short sale, buyers should be aware that it is always a sound investment.

 

How does a Home Go Into a Short Sale?

The process for a home to be determined a short sale involves an application process. When a homeowner realizes that they are unable to continue payments on their home and want to avoid the possibility of a foreclosure, they will submit a short sale application to their lender.

When determining if the home is eligible for a short sale, the lender will consider the following factors:

  • The seller’s financial hardship
    • The applicant must prove that they are unable to pay back the rest of the mortgage by showing proof of income and assets.
  • The home’s value
    • The home must be worth less than what is currently owed. This involves comparing market value and comparable properties in the surrounding area.

 

Timeline

Compared to most real estate transactions, a short sale can take anywhere from a few weeks to months due to its complexity. The lender will first evaluate their options and whether a short sale or foreclosure will bring them the most money. After determining if a short sale is a viable option, a potential buyer will see the most efficient use of their time by working with an experienced agent. Not all agents are experienced with short sale transactions, so it is important to consider their background and if they understand the process. Once securing an agent, this will increase the chances of purchasing the home.

short sale timeline

Since short sale transactions are more complex, the timeline can range anywhere from a few weeks to months.

 

Should you Purchase a Short Sale Home?

Short sales can provide numerous benefits for the parties involved. Whether it’s an investment opportunity for the buyer or minimizing the financial burdens for both lenders and sellers, short sales may be a good choice if you’re smart.

Benefits For Sellers

When placing their home up for a short sale transaction, the sellers will see multiple benefits.

  • Preventing Foreclosure
    • Since the seller went through the application process, a short sale will prevent their home from going into foreclosure which will lessen the impact on their credit score.
  • Lessen Debt
    • With a short sale, the majority of the seller’s debt will be paid off by the buyer. It is also possible that the lender will forgive the debt altogether and write it off as a loss on their end. This means that the seller will not be held responsible for paying off the remaining debt after the sale.
  • Ability to Reenter the Market
    • Under the right circumstances, a seller will be able to reenter the market and obtain a mortgage using an FHA loan. A seller is eligible for the FHA loan if they had no late mortgage or installment plans in the year prior to applying for the new mortgage.

Disadvantages for Sellers

  • No Profit
    • Since the seller owes money on the home, they will not receive any of the money from selling the home. The lender will use this money to lessen their loss.
  • Damage to Credit Score
    • While the damage is less than a foreclosure, the seller will still see a decline in the credit. Sellers with a high credit score will see the most decline.
  • Mortgage Delay
    • Following a short sale, sellers will have the ability to reenter the market after completing a waiting period. The waiting period for qualifying for a new mortgage can be anywhere from 2 to 7 years.

Not all agents are experienced with short sales, so it is important to consider their background and understanding of the process.

 

Buyer Benefits

The two main benefits for buyers are the hefty discount and less market competition. When purchasing a short sale home, the lender is highly motivated to sell in order to cut their losses. This means that the buyer will get a better deal on the home compared to purchasing another home through a regular transaction. While the discounted price is what usually brings the buyer in, it is a complicated transaction that can be a benefit if you understand what goes into a short sale. Buyers who are interested in short sales are often faced with little competition so there is a better chance of securing the deal.

Disadvantages for Buyers

  • More Time-consuming
    • Compared to a traditional real estate transaction, a short sale will take longer due to the lender’s involvement. Lenders are looking to get as much money back as possible in order to reduce their loss which increases the timeline.
  • Increased Risk
    • Short sales in real estate come with increased risk. The properties are sold “as-is” which means that the current state of the home may not be disclosed. It is therefore very important to get a home inspection to uncover any issues. The home’s condition may also lead to more money spent on repairs and renovations.

When it comes to purchasing a short sale home, you should consider both the advantages and drawbacks that go into the transaction. If you understand the timeline, condition, and additional costs that the home may require, then it may be a good investment for your future.

Before considering a short sale home, be sure to talk with experienced real estate professionals. Need help finding an expert? Contact our team at Metropolitan Title today!

 

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