Whether you buy or sell a house or not, the common real estate term you’ve probably seen is “short sales.” Short selling houses are a good way to extend your budget if you are a buyer or if you are a seller you can no longer afford to do so.
This Redfin article will explain the basics of selling or purchasing a short-selling house. Whether you’re looking at your home in Charlotte, North Carolina or if you need to sell your home in Philadelphia, PA, we’ll help you determine if short selling is worth the extra time and effort.
Key takeout
Short sales occur when a homeowner sells for less than he or she has a mortgage. For sellers, short sellers must be approved in advance by the lender. For buyers, short selling can take up to a year, but the less you get a better home.
What is short sales?
Short sales occur when a homeowner sells a home for less than their unpaid mortgage. This process must be permitted by the mortgage lender. Short sales usually occur when the current value of a home is lower than the outstanding balance on the loan, or when there is a risk of foreclosure due to unpaid mortgage payments.
For example, if a homeowner has a good mortgage balance of $400,000 and the current market value of the home is $350,000, then $50,000 will be shorter. That’s the origin of the term “short sale.”
Any revenue from sales goes to lenders. Whether the seller will owes additional debt repayments depends on the lender or the bank.
Short sale and foreclosure
Short sales and foreclosure are two processes that can occur when a person is unable to pay a mortgage. However, there is an important difference.
Short sale
The homeowner begins a short sale by submitting financial information to a lender who approves a short sale. In many cases, homeowners do this to avoid foreclosure. The owner will begin the home sales process with the real estate agent after the lender has approved the short sale. Short selling will have a negative impact on the owner’s credit score, but do not prevent you from getting another mortgage.
Foreclosure
The lender seizes the property as a result of failing to pay the mortgage. Often there are many attempts to correct the situation before the foreclosure process begins. This is usually the last option for homeowners. The lender or bank owns and sells the property. Foreclosures also negatively affect the owner’s credit score, often preventing them from getting another mortgage for a while.
How to buy short-selling property
There are several factors to consider when purchasing a short-selling home. Here are some things you can expect as a potential buyer:
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1. Prepare for a long timeline
Expect the entire short selling process to take up to a year to be submitted when you actually own the home. It’s possible to finish short sales in a short few weeks, but it’s important to be realistic about your timeline.
2. Find an experienced real estate agent
To buy a short-selling home, you need the help of a qualified real estate agent who understands all aspects of the process, including how short-selling for sellers and home buyers works. Experienced agents can navigate the complexity of dealing with lenders, accurately assess the potential value of the property, and manage buyer expectations regarding timelines and obstacles.
3. Submit a strong offer with a comp
As a buyer, if he sees a short sale house he wants to buy, the agent must write an offer that is presented to the seller’s mortgage lender. The offer letter must include a list of equivalent sales. Lenders will want to ensure that their homes are sold at a price close to market value, as they usually lose money in the transaction.
Once an agent submits an offer package to the bank, it can take up to 30 days for the bank to approve the receipt. Negotiators will be assigned within the next 30 days, and in some cases a second negotiator may be added to the file.
4. Waiting for lender approval
The traditional home buying process involves negotiations between the buyer’s agent and the home seller. With short sales, the lender has the final say on whether the offer to buy is accepted. They review your offer, assign negotiators, and ultimately approve, reject or refute your offer. This step can take more than 30-60 days.
Pros and cons of buying a short-selling house
There are some advantages and disadvantages to consider when purchasing a short sale. Let’s take a look at them:
Buying a short sale
Buy a great home for less: One of the biggest benefits of buying short-selling property is the possibility of owning a great home for a lower price. Lenders and banks are often interested in selling their homes for market value rather than making a profit. It’s less risky than buying a foreclosure. Usually there is less risk of involvement in short-selling purchases than foreclosures. Buyers can usually request a house inspection at short sales, unlike foreclosures where banks do not require them to disclose information about real estate. Less competition from other buyers: Short selling often takes a long time, so buyers who aim to move quickly often aren’t interested in them.
The disadvantages of buying short sales
Long Timeline: Short-term sales often take months to a year to complete the status of the property, as lenders are heavily involved in the process. If the homeowner can’t maintain the property and the home needs major repairs, the price may not be worth it. These properties are usually sold as is, so pre-listed repairs are often not completed. Additional pre-work: Buyers may typically need to understand the value of the home, check for liens, and perform additional work to identify the major structural issues of the home. Retipster founder Seth Williams hopes for delays from buyers and advises “use that extra time to dig into property details, title issues and inspection reports.”
How does short sales work for sellers?
Each mortgage lender has its own short selling standard. Generally, lenders consider allowing short sales if:
The market value of the home has declined based on the recently completed sales of comparable homes in the area. Homeowners are approaching default on their mortgages and have no assets available to use to cover mortgage payments. Homeowners have experienced qualified difficulties that prevent them from paying differences in mortgage balances and current or future market value.
Sellers usually need to prove they have qualified difficulties in the form of letters describing their situation. This letter may need to be an affidavit provided with documents to verify the facts surrounding the reasons for the short sale.
When it comes to navigating the short selling process, Daniel Apke, founder of Land Investment online, advises, “presenting a fully and well-documented short selling package to lenders for sellers will help increase approval and improve the likelihood of a smooth closure.”
Pros and cons of short selling for sellers
There are also advantages and disadvantages of short selling as a seller. Here are some things to consider:
The advantages of short selling for sellers
Preventing foreclosure: One of the biggest benefits of short selling is that it prevents your home from entering foreclosure. Foreclosures can lead to a long-term impact on your credit score and the ability to acquire another mortgage. Potential debt return: When a buyer buys a home, the seller’s debt may be allowed. After a sale is made, it depends on the lender whether the seller borrows additional money or not. Ability to fund your next home: Short selling and have the ability to get an FHA loan as your next home loan.
Cons of short selling for sellers
There is no room for revenue or negotiation: Sellers owe money to the house and therefore do not receive any revenue from the sale. Furthermore, you cannot negotiate the selling price. The impact of credit scores: Short selling can damage a seller’s credit score, but in many cases there are far less damage than foreclosure. Delay in taking a mortgage: There is often a 2-7 year waiting period before a seller applies for a traditional mortgage. However, they often qualify for an FHA loan. Additional Debt Repayment: If the sale of the home does not cover the debt owed by the seller, the lender may sue the seller. This is called a shortage ruling, but it is not legal in all states.
Is short selling perfect for you?
Whether you want to buy a short sale or need a short sale to sell your home, it comes down to your situation. As a buyer, if you have time to wait for the short selling process to complete, this may be a good opportunity to buy a home at a low price. As a seller, short selling may be the right option to avoid foreclosure and allow you to pay off your debts.
