Homeowners list their properties as short sale homes when their values drop below the amount of mortgage owed and they can’t pay it back.
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Meanwhile, buyers see short sales as a lucrative investment opportunity because they are a much safer bet to foreclosures and are often priced below market value.
Since they are the last resort to avoiding foreclosure, short sales are also labeled as distressed sales, but they are usually in better condition than distressed properties. What you as a buyer need to remember is that short sale transactions are more complex than regular sales and involve more risk. On the other hand, if you nail everything right, it can bring you more money than a normal real estate investment.
Let’s walk through the basics of investing in short sale homes, the pros and cons, and how to find them.
What Is a Short Sale?
What is a short sale? If you’re a beginner investor in the world of real estate investing, this article is here to guide you through the process.
Short sales occur when homeowners find themselves in a difficult financial situation. In those situations, they may decide to sell their property for less than they owe on their mortgage so the lender agrees to forgive the remaining balance of the loan. A short sale is usually a preferable alternative to foreclosure, even though it may sound like a less than ideal bargain for the lender. It’s a surefire way for both the lender and homeowner to take a loss in order to get out of the tough financial situation.
The buyer of a short sale home can definitely profit from such a transaction, but one should remember that buying short sale homes isn’t always the best investment. It differs from purchasing an investment property at a foreclosure auction.
Difference Between Short Sale vs Foreclosure
In the short sale vs foreclosure discussion, people often tend to misuse and confuse the terms. The truth is that both occur when a homeowner finds that their mortgage is underwater or is struggling to keep up with their mortgage payments. But neither a foreclosure nor a short sale is an easy way out for home sellers who want to get rid of their mortgage obligation.
When a homeowner owes more on their mortgage balance than the sale price or market value of the property at the point when they want to sell, a short sale may happen. The homeowner initiates the real estate short sale when he or she is basically asking the lender to accept a lesser amount than the total mortgage owed.
For instance, if the homeowner sells the house for $200,000, but the remaining mortgage loan balance is $300,000, the seller is $100,000 short of paying back the lender. During the short sale process, the potential buyer will deal with the home seller, but the lender is the one who must review and approve all the details around it.
Even if the buyer and seller agree on terms, the entire process can be unpredictable and lengthy because the lender has the final say.
When it comes to foreclosures, the lender (typically a bank) takes ownership of the short sale home once the buyer can’t keep making payments. The lender then initiates the process and will force the home sale to try to recover the original loan amount. Unlike short sale homes, foreclosed properties are usually already abandoned. If the homeowner is still living there, they will eventually be evicted by the lender.
A foreclosure often takes less time than a short sale because the bank will try to sell the estate as quickly as possible.
Why Short Sales Are Preferable to Foreclosures
Homeowners usually prefer short sales instead of foreclosures for two reasons:
- Short sales occur on a voluntary basis (while a foreclosure is forced); and,
- After a foreclosure, homeowners must wait seven years before being able to obtain another mortgage loan (in a short sale situation, they must wait for at least two).
Lenders also prefer short sales to foreclosures because they can take back a larger part of the original loan without having to spend much on legal processes.
Another Alternative to Buying Short Sale Homes
If you have insufficient funds to buy a property and can’t qualify for a loan, there are some creative methods for making it happen, such as subject to real estate. If the homeowner cannot pay off their mortgage, you can take over their mortgage payments. In other words, you are purchasing a house subject to the existing mortgage (without making it official with the lender).
Why would a seller agree to a subject to mortgage? Because they need a solution to an urgent problem. They won’t be responsible for making timely mortgage payments anymore, which will improve their credit score. They also won’t have to make repairs, pay fees, and closing costs, and undergo foreclosure.
How Does a Short Sale Work?
If you’ve been asking yourself this question, you should know that the process is almost the same as a traditional real estate deal. However, the lender’s involvement is what makes it more complicated. A typical short sale process (for buyers) involves the following steps (usually in this order):
1. Identify Potential Short Sales
Check legal ads, search courthouse listings and online listings, or hire a buyer’s agent specializing in short sales. To identify a good deal, you must determine how much is owed on the house compared to its approximate market value. A great real estate short sale property candidate is a house with a high market value. If the homeowner has a lot of equity in it, we suggest you pass because the lender will probably want to foreclose.
2. Inspect the Property
Property viewing and inspection are necessary to determine the condition of the property and how much it will take to renovate or repair. Typical real estate buyers won’t consider it if it needs work, which works in your favor.
Find out the property’s real market worth and its profit potential. If you want to renovate and rent it out, you will want to find out the potential ROI.
Also, be sure to conduct a neighborhood analysis of similar properties nearby. Mashvisor has tools that provide crucial information for real estate investors, such as rental comp, traditional and Airbnb rental income, cap rate, cash on cash return, etc.
Learn more about how we will help you make faster and smarter real estate investment decisions:
4. Look Up Existing Mortgages and Liens
Ask the home seller what liens are on short sale homes and who is the primary lien holder. Before closing the deal, you should confirm the info through a title search. This is done to make sure that there are no undisclosed liens on the house.
5. Apply for Financing
How are you going to pay for the short sale home? The lender you are transacting with will probably give you a loan if you have good credit standing. Also, they’ll probably be able to expedite your loan application process since they already have most of your info from the short sale paperwork. If you’re thinking of getting a mortgage elsewhere, there may not be enough time because it’s common for the lender to require closing the sale in 20 days after finalizing the agreement.
6. Reach Out to the Lender
One of the biggest initial challenges could be contacting the decision-maker. You should speak either with the lender’s resource recovery department or loss mitigation department. For the lender to get permission to discuss the mortgage situation, they need to have the homeowner complete and sign an authorization letter.
7. Complete the Short Sale Application
Many lenders typically have an application created specifically for short sale requests. If they don’t, be sure to find out what kind of paperwork is required to consider a short sale.
8. Create a Proposal
A typical short sale proposal consists of the application form and the authorization letter, as well as a:
- Statement of the property’s value
- Purchase and sale contract
- Detailed description of the costs and liabilities
- Hardship letter from the delinquent homeowner
- Settlement statement
9. Negotiate Terms and Close the Deal
As with any transaction, the other side (lender) may come back with a counteroffer or reject your offer. Figure out your highest limit beforehand and if the lender won’t agree to meet your figure, don’t be afraid to walk away.
When you reach an agreement, get everything in writing, and close the deal.
Pros and Cons of Buying Short Sale Homes
As every coin has its two sides, short sale real estate transactions also have their benefits and drawbacks.
- Getting more out of your budget. In a short sale house transaction, you are most likely to get a better deal. In other words, you’ll be able to buy a nice property in a high-end neighborhood that you wouldn’t otherwise be able to afford.
- Sellers are motivated to sell. The lender wants to recoup their losses while the seller wants to avoid foreclosure. Therefore, they’ll work to approve a home sale deal which puts you, as the buyer, in a great position to negotiate for a lower price.
- Better property condition than a foreclosure home. Foreclosures are often distressed properties, while short sale homes are typically still occupied. And since the homeowner still owns the property, they keep it in good condition. Also, short sales haven’t been flooded, vandalized, burglarized, or squatted for months without anybody noticing. Short sale and estate sale house could be a great fix-and-flip opportunity, but only if the renovation costs aren’t too high.
- Less competition. As we said before, the short sale process is complex and the time frame is uncertain. This is what detracts some buyers from pursuing the transaction. If you are ready to pursue a short sale, there will definitely be less competition down the road.
- Possibility of inspection. You cannot get an inspection done when buying a foreclosure at an auction. Short sale homes, on the other hand, can be inspected by the buyer and a professional, which makes it a less risky option.
- Uncertainty of time frame. It takes considerably longer to close a short sale deal (up to three months) than for a traditional house sale (around 45 days). After making an offer, it has to be approved by the lender and then accepted by the short seller, and there’s a chance that either of them may reject it.
- Lender and seller involvement. Both parties will be involved in the transaction, trying to recoup as much money as possible. They can make counteroffers and ask for concessions.
- Large down payment. Lenders have the final say in a short sale transaction, so buyers often craft an offer that caters to the lender. In many cases, this involves a higher-than-usual down payment.
- Property in a state of abandonment or disrepair. Short sale homes may not be in the perfect state. Be sure to work with a home inspection professional or a buyer’s agent to avoid any unpleasant surprises.
- Little room to negotiate. As a buyer, you don’t have much room to negotiate for a short sale house (in terms of concessions and price). The room is limited because the lender knows how much money they are ready to lose on the deal.
- Hard-to-find listings. Since the homeowner has to be in a specific circumstance to do a short sale, these listings are not that easy to find. When the real estate market is strong, you’re less likely to find them overall.
How to Find Short Sale Homes
You’re after short sale homes but don’t know where to start looking for one? There are a few methods to do it:
Experienced Buyer’s Agent
The first and most obvious move is to hire a real estate agent to help you find a short sale. It’s best to look for someone established in your area who knows his way around. Local real estate agents are the ones who know where to find a short sale. Many real estate brokerages have lists of short sales and provide them to those who are interested in buying.
Once you’ve teamed up with a buyer’s agent, ask them to give you MLS access so you can search for short sale homes in your desired area. You can either search them directly through the MLS or check the listing description for clues. Some might list their homes as a short sale directly or indicate it by saying “headed for auction”, “notice of default”, or “subject to bank approval.”
Through the Courthouse
Another way for finding short sales is directly through the courthouse. Visit the county or city clerk’s office and you’ll find lists of people in pre-foreclosure. The pre-foreclosure period usually lasts six months after the homeowner’s last missed mortgage payment before the lender will foreclose the home.
Various online platforms, such as Mashvisor, are equipped with tools for finding different off market properties in the 2022 US housing market. These include short sales as well as foreclosure houses and REO properties. The advanced search filtering options allow you to search for houses according to:
- Listing price
- Radius in miles
- Property type
- Listing type
- Rental strategy
- Number of bathrooms
- Number of bedrooms
- Cap rate
- Cash on cash return
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Finding Short Sale Homes on Mashvisor
With Mashvisor, you only need a computer and an Internet connection to access so much valuable information. You can just search “how to find short sale homes” or “how does a short sale work” and get instant access to Mashvisor’s knowledge hub. There, you will be pointed in the right direction.
Mashvisor offers tools for finding off-market properties, which is all you need to find anything, including short sale homes. Besides just finding them, you can analyze the return on investment potential of short sell homes for sale in any part of the US housing market. The numbers will help you detect the ideal investment opportunity and help you pursue it.
Other types of properties you can find with Mashvisor are pre-foreclosures, foreclosures, tenant-occupied rentals, and bank-owned rentals.
With Mashvisor, you can:
- Conduct a property search on your own or find a real estate agent in your area to lend you a helping hand.
- Due diligence. Once you find a potential investment opportunity, you need to obtain more information. You can perform a comparative market analysis to find the prices of recently sold properties (similar to yours) in the neighborhood.
- Run a thorough financial analysis. The numbers you can run on Mashvisor will show you whether a property can generate a positive or negative cash flow. You can find out the property’s fair market value and make sure there’s a rental demand in the area. Make use of our investment property calculator to conduct an investment property analysis. This advanced analytics tool will provide important metrics, such as cash on cash return, cap rate, rental income, and Airbnb occupancy rate in just a few moments.
Now you know that buying short sales can be an excellent real estate investment strategy, but you must be guided either by the right people or the right numbers. All you have to do now is open Mashvisor, find short sale homes that match your criteria, and conduct a comprehensive analysis. Your next investment property is just a few clicks away.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.