Before Buying a Short Sale Home

realtor showing couple interior of house
••• Andersen Ross/Digital Vision/Getty Images

Buyers who pursue short sales firmly believe that it will present them with a good deal. Before jumping on a home you see listed for a price you think is too low for the neighborhood, ask your agent to call the listing agent to find out if the home is a short sale, because you might want to think twice about making an offer on a pre-foreclosure, short sale home. It's not as simple as you may believe, and very few can close in 30 days or less.

Defining a Short Sale

A successful short sale means the seller's lender is willing to accept a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. That's because sellers need to qualify for a short sale. If their agent sells very few short sales, that's a red flag for your buyer.

Be aware that the seller doesn't need to be in default before a lender considers a short sale; a lender may consider it if the seller is current, but the value has fallen. The seller may also owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.

 © The Balance, 2018

Check the Public Records

Do your research before making an offer to purchase. Your agent can find out who is in the title, whether a foreclosure notice has been filed, and how much is owed to the lender(s)—which is important because it will help you to determine how much to offer. 

Remember, banks are not under duress to accept a short sale so the offer needs to be reasonable.

If there are two loans, you could have a problem. The first mortgage lender's position is protected by the second lender unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation, but it's not nearly as much you would think. Often $3,000–$6,000 is acceptable.

Hire an Agent with Short Sale Experience

It's already less-than-ideal if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an experienced short sale agent who can anticipate surprises, stop problems from happening, and help to expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one bothered to follow up in a timely manner.

Qualifying the Property and Seller for a Short Sale

A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers will need to provide a hardship letter to the lender and may owe taxes on the amount of debt that is forgiven.

It is illegal for a seller to demand that buyers pay them to be given the right to purchase the seller's property; do not be lured by sellers who suggest this practice. In a short sale, the seller typically receives no money because the lender is losing money. A HAFA short sale was once an exception, but those no longer exist.

Submit Documentation and Purchase Offer to Lender

Once the seller has accepted your offer, the listing agent will send it to the lender for approval; you do not have a deal until the lender accepts. The lender will want a copy of your earnest money deposit and proof of funds, as well as want to see that you are preapproved for your own loan, so send a current preapproval letter for the lender, dated within the last 30 days. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.

Give the Short Sale Lender Time to Respond

Make your offer contingent upon the lender's acceptance and give the lender a time frame to respond, after which you will be free to cancel. Some lenders submit short sales to committee, but most can decide within two weeks to three months. As a buyer, you cannot contact the lender, nor can your agent; the listing agent should have the appropriate information for the lender, so be patient.

As a buyer, you cannot contact the lender nor can your agent, so be patient.

Understand Short Sale Commissions

The seller is not keeping any of the money but still pays the commission from the proceeds of the sale. Regardless of the commission the seller has agreed to pay, the lender is the entity approving the commission. The lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.

If you have signed a buyer's broker agreement with your agent, ask if the agent will waive the difference due, or you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent, but the lender is calling the shots.

Reserve the Right to Conduct Inspections

Generally, the lender will not allow a seller to pay customary items that a traditional seller would pay—including home protection plans for the buyer, roof, pest or termite inspections, and pest completions. A buyer will be asked to purchase the property "as is," which means no repairs.

It is extremely important that a buyer obtain a home inspection. Be sure to reserve your right to one before agreeing to purchase a short sale home. 

Additional Resources