Short sales occur when a home is sold at a price that’s lower than the homeowner’s remaining mortgage balance. Short sales are often the last resort for a borrower to avoid foreclosure if they’ve fallen behind on their mortgage payments.

On the other end of a short sale, homebuyers can find good deals on properties. In fact, for those interested in finding a fixer-upper for real estate investing, buying a home at a lower sales price can make it easier to profit from a property. But short sales can be difficult to find, and it’s a good idea to approach a short sale with caution due to their often complicated nature.

Here to walk you through the basics of short sale listings in real estate is

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What is a short sale in real estate?

In real estate, a short sale occurs when a property’s asking or sale price is lower than what the current owner owes on their mortgage.

To proceed with a short sale, a homeowner will typically need their mortgage lender’s permission first, and it’s often the last resort to avoid foreclosure when a homeowner is in dire financial straits.

When a home is purchased in a short sale, all proceeds from the sale will go toward the lender. As for the remaining balance, the lender can either opt to forgive it or require the previous owner to pay them the difference—in some cases, state law will dictate what the lender can do.

How to understand a short sale listing

A home sale listing may not explicitly state that it’s a short sale, but there are certain signs you can look for.

If a home sale uses language like “subject to bank approval,” “notice of default,” or “third-party review required,” for example, you might be looking at a short sale listing.

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Foreclosure vs. short sale

A short sale is often done to avoid foreclosure. Neither option is ideal for the borrower or the lender, but in the case of a short sale, the lender is at least able to retrieve some of the home’s remaining mortgage balance from another buyer.

When choosing between a foreclosure and a short sale, a lender is usually more inclined to pick the option that will help them recover more of their funds.

How does the foreclosure process work?

In a foreclosure, the mortgage lender takes over a home after the homeowner has failed to make payments. The homeowner will either leave on their own accord or be evicted after a certain date, and the lender will have the home appraised and listed for sale.

The home is sold as a real estate-owned (REO) property.

Foreclosures can stay on a borrower’s credit report for seven years, which can affect their ability to buy another home in the future.

How does the short sale process work?

Short sales give a borrower more options in difficult financial circumstances. A homeowner might not necessarily have to leave their current home while the short sale process is underway. Additionally, they can avoid some of the more severe financial consequences that can come with foreclosure, making it easier for them to purchase another home soon.

A short sale can still negatively impact a borrower’s credit score, but not as much as a foreclosure would.

To proceed with a short sale, a borrower will need to get permission from their mortgage lender, which will usually require them to prove they don’t have the resources to continue making payments on their home. The documentation they’ll have to provide typically includes:

A hardship letter explaining the borrower’s financial circumstances and why they’re no longer able to afford their mortgage

Documentation of financial information, which could include bank statements, medical bills, tax returns, and more

A list of other lienholders against the property

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What are the alternatives to a short sale?

While a short sale is a more ideal alternative than foreclosure, as a borrower, there might still be other options out there for you to consider before resorting to a short sale. If you haven’t already, you could contact your lender to explore alternative options for your past-due payments, which could include establishing a repayment plan, forbearance, or home loan modification.

If you’re able to make your monthly mortgage payments but your mortgage is technically underwater (the balance is more than it’s worth), you might want to consider waiting to sell your home until local housing market conditions improve and home values increase again.

Pros and cons of buying a short sale

Short sales can come with plenty of pros and cons for everyone involved—including the buyer.

On the one hand, a short sale presents the opportunity to purchase the type of home you’re seeking at a lower price.

On the other, the process of a short sale can be long and drawn out, and they can also be prone to falling through. It’s also possible that you could purchase the home only to discover that it has more serious repair needs than you expected, which could end up causing you financial and emotional strain.

Another consideration is that, unlike in a traditional home sale, you may need to cover some or all of your closing costs, as the mortgage lender may be unwilling to do so since they’re likely already losing money on the short sale.

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What to avoid in a short sale listing

Some short sales are bargains, and some end up being more than you bargained for. That’s why it’s important to read the details of a short sale listing carefully to watch out for any potential red flags.

Short sale homes advertised as “fixer-uppers” or being sold “as-is” may need just a little work—or a lot. And you might not know which is which until you’ve taken ownership of the home for yourself. If a current owner hasn’t been able to keep up with their mortgage payments, it’s also possible they haven’t been able to pay for ongoing maintenance and repairs, either.

It’s also very common for short sales to fall through. Listings that state home sale is “subject to third party approval” suggest that a lender hasn’t approved the home sale yet, so you may not want to get too attached to the home too early.

How to buy a short sale home

The following are general steps a buyer might take during the short sale process.

Ensure you have financing in place: Seeking a mortgage pre-approval can help prove you’re in good financial standing to purchase the home.

Find a real estate agent and look for short sale listings: Identifying short sale listings on your own can be challenging, but a realtor who has experience with them can help you find them more quickly. Not only should they be familiar with the area, but they’ll also have access to the multiple listing service (MLS), which provides more in-depth details on properties, including those that could reveal a short sale. A realtor who has a

Short Sales and Foreclosure Resource (SFR)

certification from the National Association of Realtors is often a good candidate to consider. You might also be able to find short sale candidates by retrieving public pre-foreclosure records from your local courthouse.

Look at other area home sales: Once you find a listing that seems appealing to you, compare its list price with home sale prices of similar homes in the area.

View the property: Set up a property visit to assess whether it’s the type of home you’re looking for. Look for any upgrades or repairs that might be necessary and what those costs could look like, and keep in mind that short sale homes aren’t subject to the same disclosure requirements of a traditional home sale.

Check to see if there are any other property liens: Before making an offer on a short sale, you’ll want to know if there are any liens against the property in addition to the current mortgage. These could include a second mortgage, tax liens, child support liens, and more. Usually, each lienholder will need to grant approval before a sale can be approved. In a short sale, getting approval from additional lienholders can make the process move more slowly, and a portion of their debts may not be repaid by a short sale, which is often a reason that short sales end up falling through.

Make your offer: Your realtor can offer you guidance on what kind of offer you should make in a short sale, as can the research you’ve done on your own. Experts often recommend making an offer close to the home’s fair market value for the best chance at getting an accepted offer. The buyer will need to have submitted certain documentation on their end and you might also need to submit a short sale application of your own, depending on the lender’s requirements. Expect the possibility of some back-and-forth negotiation between you and the lender.

If your offer and the seller’s short sale application have been approved and all the necessary documentation has been shared, you’ll be able to close on your short sale home purchase and obtain the title to your new home!

MORE: How to buy a foreclosed home

Should you purchase a short-sale property?

Short sale listings can end up being good opportunities for other homebuyers, but it’s important to evaluate the details of a short sale carefully. Short sales can be particularly appealing candidates for real estate investors, who can flip a distressed property and sell it at a profit when the conditions are right.

Just like with any real estate transaction, you should only proceed with a short sale when it makes good financial sense for you to do so, lest you end up on the other end of a short sale yourself. You’ll want to make sure that the home you’re considering is in good condition or that needed repairs are things you’ll be able to handle (and afford).

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FAQs

What is the process of a short sale?

The process of a short sale requires a homeowner to get approval from their lender to proceed with a sale, despite the likelihood that the current mortgage balance won’t be paid off in full. A homeowner will usually have to provide different types of documentation to prove financial hardship.

From there, a prospective homebuyer will need to make an offer that appeases the mortgage lender as well as any other lienholders that might have a stake in the property, and all will need to grant approval for the sale to go through.

What’s a reasonable offer on a short sale?

A solid purchase price can often determine whether or not a short sale is approved. Real estate experts often recommend offering a home’s fair market value in a short sale.

Is buying a short sale a good idea?

Buying a short sale home can be a good opportunity to save money on a home purchase, but it depends on the circumstances surrounding the short sale.

Whether it’s a good idea will depend on real estate market conditions, your current financial situation, and your ability to make or afford unexpected repairs on the home, among other factors.

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