Short Sales 101

If you’ve ever browsed through home listings, you’re likely to have stumbled across “short sale” properties from time to time. In layman’s terms, a short sale happens when a seller’s debt on a home surpasses the property’s market value. In such cases, a seller may choose to avoid foreclosure by selling their home as a short sale. This requires bank approval, since it means the lender will be accepting less for the home than what is actually owed. For prospective buyers, short sales can spell opportunity because a distressed seller may hope to sell the property quickly for a discounted listing price.

If you’d like to pursue a short sale, however, it’s important to know that the term is a bit of a misnomer: a short sale is actually a very long process. It begins just like any home purchase – with mortgage preapproval that tells the buyer how much house they can afford – but there are additional hoops to jump through before an agreement can be reached.

When a prospective buyer has identified a short sale home they’d like to purchase, they must make an offer through a licensed real estate agent. This step takes longer in a short sale, because it isn’t up to the seller to accept or reject the offer. Instead, the ball is entirely in the bank’s court, and they must also accept the terms. This process can, unfortunately, can take several months or more. The bank will expect a fair market value offer, and real estate agents can be quite helpful here, as they have access to the sale price of other comparable listings in the area.

If the bank accepts the buyer’s offer, they will typically require said buyer to apply for a mortgage through their institution in order to ensure their creditworthiness. However, the short sale bank cannot require that the buyer finance through them, so the buyer still has options. As with any home purchase, buyers are best served by shopping around for the mortgage rate and terms that best suit their financial situation. Since short sales take time and most lenders only lock interest rates for 30 or 60 days, it’s also smart to ask lenders about the rate outlook for the near future on any types of mortgage loans the buyer has an interest in.

Since short sales tend to be a lengthy process, it benefits a buyer to take all possible steps to move the sale forward. This includes acting quickly to address any requests from the seller’s lender, including appraisals and inspections. This way, the buyer won’t have any loose ends to tie up once the seller’s bank is ready to close on the short sale property.

Image via Flickr/patmcknight