Buying a short-sale home: Process, risks, and benefits

Short sale homes can sell at lower prices, creating great deals and instant equity for new home buyers.

These sales are also complex. They have to clear several hurdles to close, and properties typically sell as-is, creating more risk for the buyer.

What is a short sale home?

A short sale happens when a homeowner sells their home at a price that's lower than what they owe on the home loan.

For example, a homeowner may owe $250,000 on the mortgage but agree to sell the home for $225,000.

The mortgage lender has to agree to this first. The lender agrees to accept the lower price as full payment on the loan, even though it comes up "short." Hence the name short sale.

For the home seller, a short sale can help avoid foreclosure. For the home buyer, a short sale could offer a better deal on a new home. 

Short sales also appeal to real estate investors since they can create more return on investment. 

Why would a lender agree to a short sale?

Ideally, every home's value will always exceed its current mortgage balance, but not every real estate transaction works out like this.

A recently financed home is more vulnerable to negative equity, also known as "being underwater," when property values in the area decline. Or, if a home's condition deteriorates after the loan closes, its market value may fall below its mortgage balance.

Most of the time, the homeowner can wait this out. Property values tend to increase in the long term even if they fall for a year or two. As the homeowner keeps making mortgage payments, the balance due on the loan also decreases.

But what happens if the homeowner can't afford the payments or needs to sell for another reason? These borrowers could be facing foreclosure. Foreclosures cost lenders money so some will agree to a short sale instead.

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Short sale vs. foreclosure: key differences

The primary distinction between a short sale and foreclosure involves who controls the process:

Short Sale

• Homeowner initiates the process
• Seller remains in charge of marketing and showing the home
• The lender approves or rejects offers
• There's less damage to seller's credit score
• Faster for the buyer in most cases

Foreclosure

• Lender starts the process after homeowner defaults on the loan
• Lender takes possession of the home and controls the sale
• No seller involvement in offers
• Severe credit score impact for the original homeowner (3 to 7 year waiting periods before getting a new mortgage)

Homeowners who complete short sales can often purchase another home through FHA programs much sooner than homeowners who experience foreclosure. This makes short sales an attractive option for sellers facing financial difficulties.

How to buy short sale homes

Now that you know what creates short sale properties, it's time to consider whether buying one is the right plan for you.

Here are some short sale buying steps:

1. Get preapproved for a mortgage

Mortgage preapproval shows your financial readiness to sellers and their lenders alike. Being pre-approved means you're a serious buyer with verified financing.

Cash offers may still get priority consideration, but preapproval letters show you're already prepared to come up with financing to buy the home as quickly as possible. 

Better's preapproval process takes as little as three minutes.

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2. Find short sale listings and work with an agent

It's best to work with a real estate agent who is experienced specifically in short sales. These agents can save a lot of time and headache later.

3. Research liens and property condition

Title searches show who else has claims to the property. A title search is an essential step for buying any home, but it's especially important with short sales.

Schedule your own home inspection to look for dangerous and expensive issues like termites, mold, or structural damage that could undermine your investment.

4. Make a realistic offer

A short sale can be a great deal, but don't expect a steal. Make an offer that's close to the home's market value. Underpricing is the primary reason banks reject short sale offers.

The offer has to be better than a foreclosure, from the lender's point of view, so lowball offers typically get no response. Look at comparable sales to support your pricing strategy. (Your real estate agent can help with this.)

5. Submit a complete offer package

Your documentation must include:

• Purchase contract signed by both the seller and the buyer
• Earnest money deposit
• Preapproval letter
• Comparable sales supporting your price
• Proof of funds

Incomplete packages usually get rejected which delays an already complex process.

6. Wait for lender approval and close the deal

Expect 60 to 90 days for lender approval after submitting complete offers. Homes with multiple lien holders require more time since more lenders have to agree. Once approved, proceed to closing.

Market conditions can change during extended approval periods, so stay flexible with your terms and timing.

Potential risks for short sale properties

Short sale purchases create financial advantages, but you should understand the challenges before moving forward:

Longer closing timelines

Short sales may require three to six months to complete, far exceeding traditional purchase timelines. Lender approval may take up to 90 days after you submit a complete offer.

This takes so long because the process requires several layers of approval. Primary lenders must evaluate your offer, then second lien holders need time to review terms, and property conditions may change along the way.

Selling 'as-is' with limited disclosures

Short sale properties come without warranties and with minimal seller disclosures. This means the buyer has less protection. 

Sellers experiencing financial distress may have deferred home maintenance, creating a long list of necessary repairs for the new buyer to complete. Without a proper inspection, foundation problems, plumbing issues, or electrical concerns could surface later, impacting your investment significantly.

Multiple parties complicate approval

Beyond the seller, all lien holders must approve your transaction. Primary mortgage lenders, subordinate mortgages, taxing authorities, and other creditors each have different rules. Getting all these parties to agree, especially when their financial interests conflict, can be difficult.

The primary lender might accept your offer, but a second mortgage holder might not like it. Any stakeholder can nix the deal.

Higher likelihood of deal failure

Since they take months to negotiate, short sales can start to feel like moving targets. Deals can fall apart because the seller made other plans after all or because a subordinate lien holder would have to take a big loss. 

Market conditions can also shift during the approval process, affecting property values and lender willingness to accept your offer.

Hidden repair and legal complications

Without thorough inspections, you risk discovering substantial repair needs post-purchase. Legal complications like undisclosed tax liens, boundary disputes, or title issues may emerge later. Asking thorough questions before buying helps, but some problems remain invisible until you own the property.

Smart strategies to succeed with buying short sale homes

Short sale success demands strategic planning and knowledge. These proven strategies can significantly increase your chances when pursuing these unique properties.

Work with an experienced agent

Partner with a real estate agent who specializes in short sales. These pros understand the intricate approval process and can research property values, liens, and potential issues before you submit an offer. They provide essential guidance through the often lengthy short sale vs. foreclosure timeline.

Your agent should be able to:

• Identify legitimate short sale opportunities
• Verify lender approval status
• Research comparable sales data
• Handle complex lender communications

Prepare your documentation package

Gather these essential documents before viewing properties:

• Mortgage preapproval letter: Shows lenders you're financially qualified
• Proof of funds: Bank statements or equity line documentation
• Substantial earnest money: Demonstrates serious intent
• Recent comparable sales data: Supports your offer price

Complete documentation expedites the process and demonstrates your seriousness to lenders evaluating multiple offers simultaneously.

Submit competitive offers with minimal contingencies

Lenders reject lowball offers. Price your offers near fair market value and limit contingencies that could delay closing. Cash offers receive priority consideration, but substantial down payments also strengthen financed offers.

Consider offering to pay the seller's closing costs. This sweetens your proposal without affecting the lender's net proceeds.

Maintain flexibility throughout the process

Short sale homes sell "as-is," so buyers should expect to do their own repairs and should budget potential renovation costs into their offer.

Is buying a short sale home for you?

A short sale purchase can work well for buyers who:

• Have a plan for home repairs: Buyers with experience doing their own home repair work often excel in the short sale process
• Don't mind a little uncertainty: Offers take time and may not yield an answer. The best short sale property buyers understand their offer may not succeed.
• Have financing already in place: Arranging financing removes one of the variables and helps put short sale buyersin the driver's seat

A short sale may not be a good fit for a buyer who:

• Needs a move-in ready home: Short sellers need out of their mortgage payments so they may. not have had the money to properly maintain the home
• Wants assurances about the property's condition: A home inspection helps a lot, but many short sales still come with a few mysteries built in
• Is looking for a rock bottom price: Contrary to what some people think, lenders don't usually agree to short salesat prices far below market value.

FAQs about short sale homes

What are the main risks of buying a short sale home?

The primary risk is wasting time. So many variables have to fall into place before lenders, sellers, and buyers all agree to the same terms. Some buyers never hear back on offers they spend hours putting together.

How long does the short sale process typically take?

In total, the short sale usually takes three to six months to complete, with the lender approval phase often lasting half that time.

What's the difference between a short sale and a foreclosure?

In a short sale, the homeowner initiates the process and remains in control of selling the property, while in foreclosure, the lender takes possession after the homeowner defaults. Short sales generally have less negative impact on the seller's credit score.

What percentage of short sale offers are typically approved?

Banks generally accept short sale offers about half the time, though approval rates can vary significantly.

How can I increase my chances of success when buying a short sale home?

To improve your chances, do the work upfront: Work with an experienced real estate agent, gather documents, arrange financing, make a competitive offer, and be prepared to wait.

Take control of your short sale decision

What is step 1 in a short sale? Finding out how much you can spend.

Unless you're a cash buyer who doesn't need a loan, a mortgage preapproval will provide a fast answer to this question.

Better's AI-driven mortgage approval process can show results in as little as three minutes without a hard credit check.

...in as little as 3 minutes – no credit impact