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Short sales were a big thing during the Great Recession, our country’s last big economic downturn before the pandemic hit in 2020.
These types of home sales, when houses are sold for less than is owed on them, accounted for more than one in 10 houses that changed owners in 2008, according to data collected by real estate site Zillow.
But it’s been a different story during the pandemic recession.
That’s because homeowners who lost their jobs and income in 2020 were protected from foreclosure and eviction under the CARES Act, but only for a year from the date they applied for protection and only for government-backed loans.
In October, mortgage delinquencies fell to 6.44%, the lowest level since March, but there are still more than three million mortgage loans that are 30 or more days past due, according to Black Knight, a mortgage analytics company.
Some experts predict the number of homeowners at risk of foreclosure should continue to decline, while others say serious delinquencies — such as loans going 90 days past due — could rise by late 2021 or early 2022 if there is no further government support.
“The expiration of the forbearance relief will be a really telling sign of how many people don’t start paying their mortgage again,” says Steven Daria, a real estate broker at Maxim Realtors in Bonita Springs, Florida, who worked on hundreds of short sales during the last housing crisis. Daria expects “there’s probably going to be a lot of people” unable to pay, which could potentially give way to more short sales entering the real estate market.
“For a good five years after the [Great] Recession, they were hot and heavy, but it’s not something we see a lot of anymore,” says Miranda Biedenharn, an agent at RE/MAX Alliance in Dayton, Ohio. “Short sales are almost an obsolete kind of real estate now, but certainly we still have a few.”
Whether or not short sales will surge in coming months, the process of buying a short sale is much different from a traditional sale. Here’s what you need to know if you are thinking of buying a short sale house:
What Is a Short Sale?
Simply put, a short sale is when a homeowner sells their house for less than they owe on the mortgage. Homeowners typically pursue a short sale when they can no longer pay the mortgage and need to move from the property. In this sense, a short sale is a far better alternative to foreclosure for the homeowner.
But the lender has to agree to the short sale, since it usually means the lender will end up with less than is owed on the mortgage. The seller usually has to go through a very intense vetting process to prove they don’t have the financial means to bring the difference to the table.
The lender “will also make that person give a hardship letter. They want the numbers and the story behind it before they’ll approve” a short sale, says Biedenharn.
For all parties involved, it’s generally easier to do a short sale than go through the high cost and hassle of foreclosing on the home.
“A lot of people wonder why the bank would even do that, and the incentive for the bank is that it will on average cost 10-15% more if they have to go through the foreclosure process,” says Daria.
With a short sale, nobody leaves with money in their pockets. The homeowner doesn’t receive any money — the lender does, and uses it to pay off part of the original loan. But the upside is that the homeowner’s credit score won’t take as big of a hit with a short sale compared to a foreclosure.
How to Buy a Short Sale Property in 7 Steps
For people with a flexible timeline a short sale house can be a decent option, but it is typically a long process, and the property involved is sold in whatever condition it happens to be in.
Expect it to take up to a year from the time you submit an offer to when you actually move into the home, says Biedenharn.
“What I used to tell everyone is that a short sale is not a short process,” says Biedenharn. “You have to really want that property to sit there and wait however many months.”
Before you buy a short sale, you should understand how the process works. It can be broken down into seven steps:
Step 1: Find Short Sales in Your Area
Look for short sales by checking online listings and using a real estate agent who has experience with short sale transactions.
“If you’re trying to find short sales on your own, it might not be as easy. In most cases a good real estate agent can send you all the short sales in the area,” says Daria. “If someone is looking specifically for a short sale, the agent should have knowledge of the process.”
Pro tip: The phrase “short sale” is a good place to start with your online search, but it’s also wise to look up other key phrases like “subject to bank approval,” “preforeclosure,” “third-party review required,” and “pre-approved by bank,” according to Freddie Mac.
Step 2: Choose a Lender and Get Preapproved
Shop around and compare different mortgage lenders. In some cases, the seller’s lender may even be willing to give you a loan. But ultimately, it’s in your best interest to explore all your options and pick the right lender for your situation.
Not only do you need to be aware of how you’re going to pay for the property, but you also need to know how much house you can afford. That’s where a preapproval letter comes in handy. Once you’ve picked a lender, get a preapproval letter as soon as possible if you want to move forward with buying a short sale property. Why? Because the seller’s lender that is processing the short sale will want to know the buyer is able and qualified to close.
Step 3: Do Your Research on the Home
It’s important to do your homework before pursuing a short sale house. Try to get a sense of the value of the home by working with your own agent to compare it to similar properties in the area. Make sure it’s in line with your budget and what you’re looking for in a house.
It’s also good practice to ask the seller or the agent what, if any, liens are on the property, and who’s the primary lien holder. A lien is a legal claim against a property, and the primary lien holder (typically the creditor) can seize and sell it as collateral. Typically, you can also find this information at the county assessor’s office or online before closing the deal. While checking for liens should be part of any real estate buying transaction, it is especially important during a short sale, since the seller is in a tough spot financially — which raises the likelihood that there is a lien on the property.
Lastly, check out the property either in person or through a virtual tour, and gauge its condition. You’ll likely have to buy the house as-is with a short sale. So if the house will need repairs, factor in a rough estimate of those costs. Don’t skip the home inspection just to speed up the process. Buying a home without an inspection is not worth the risk and can ultimately be disastrous.
Step 4: Get in Touch With the Seller’s Lender
Before you can speak to the lender, the homeowner has to complete and sign a notarized authorization letter. This gives the lender permission to speak to you about the property.
As soon as you have that, you and your agent should get in touch with the lender to get a better sense of the short sale property. Your agent can ask questions and figure out whether it’s realistic to move forward with the deal on your behalf.
Because the seller’s lender has to agree to the short sale, they may ask you to fill out a short sale application. If so, make sure to complete that. If the lender doesn’t have an application or request form to fill out, ask them what they need to move forward.
Step 5: Make an Offer
Sometimes you can get a good deal on a short sale home, but expect the price to be as close to market value as possible, says Biedenharn. That’s because the seller’s lender wants to lose as little money as possible. Work with your lender and agent to understand comparable home sales in the area. They can help you get a feel for an appropriate offer price.
Sometimes, you can get an answer back on an offer within a couple of weeks, but the majority take months to be approved or rejected, and sometimes longer.
If you’re serious about buying a short sale, you’ll have to be patient and wait. It’s not the type of transaction a buyer should pursue if they’re in a hurry.
Here’s a list of what should be included with the offer:
- A purchase and sale contract (signed by the seller and buyer)
- Buyer’s preapproval letter
- Seller’s hardship letter
- Comparable home sales in the same area
- Description of the costs and liabilities
- Settlement statement
Step 6: Negotiate the Terms of The Deal
Be prepared to negotiate. It’s common for a short sale to have dozens of offers, with only one or two being realistic. For example, if a house has been approved to sell at $250,000, don’t expect the bank to approve an offer of $150,000.
Don’t be surprised if the lender rejects your offer or comes back with a counteroffer. To increase your chances of success, make a competitive offer that’s in your budget.
There may be times where a short sale property really is a good deal, but that won’t always be true. Don’t hesitate to walk away if the lender won’t meet your figure.
“The banks are usually selling these things at market value,” says Biedenharn. “It’s not like you get a huge discount for buying one, and nobody has money to give you if it needs repairs after the inspection is done.”
Step 7: Close the Deal
Once an agreement has been reached between you, the seller and the lender, get everything in writing and officially recorded. All parties involved should have a clear understanding of the terms of the deal.
Typically, the seller has to pay some money at closing or agree to some sort of unsecured debt for the short sale to be approved. Once that’s complete, you’re officially a homeowner.