A short sale is often used by borrowers in difficult financial situations who need to sell their homes to avoid foreclosure. A real estate transaction becomes a short sale when the sellers accept less than what’s owed on the mortgage, and all proceeds from the sale go directly to the lender to pay off the mortgage.
While a short sale tends to be problematic for borrowers, buyers can often find great deals on a short sale home since they’re priced under market value. Additionally, short sale homes are usually in much better condition than distressed properties, which presents an excellent opportunity for flippers, wholesalers, and real estate investors.
This article discusses what a short sale is, the pros and cons, and how you can start looking for short sales as an investor today.
What Is a Short Sale?
Short sales are initiated by the borrower and can take several weeks or months for the lender to accept your proposal to move forward with the short sale process.
Below are five steps for borrowers when making a short sale:
- The borrower starts by talking to their lender and real estate agent about listing their home as a short sale and why they cannot keep up with their monthly mortgage payments. The borrower may also send the short sale application to their lender and should expect to hear back from them in about 1-2 weeks.
- The borrower lists the property using a real estate agent. Agents typically handle the promotional strategies in getting the word out that you’re selling your home as a short sale.
- The lender communicates with the seller’s agent about whether or not they’ve decided to accept or reject the seller’s application for a short sale.
- The next step is for the interested buyer to review the terms set forth by the lender and decide whether they want to move forward with buying the home as a short sale.
- When the buyer accepts the agreement sent by the lender, the buyer and seller start to prepare for the short sale closing, where the home is conveyed to the new buyer.
Benefits of Short Sales
Short sales have a bad reputation and are typically seen as a sign of a homeowner in financial ruin. While this may be true in most cases, there are several other reasons a home could be sold as a short sale.
Short sales also provide some benefits to borrowers, lenders, and buyers. Below are the most common benefits that short sales offer:
- Below market prices – Short sales stand to benefit the most for the buyer since they can often purchase a short sale home for under the market value.
- Less competition – Short sales tend to repel some investors due to the complexity of the short sale process, which means buyers should expect less competition in the market when putting an offer in for a short sale home.
- Saving money by avoiding foreclosure – While lenders take a loss when making a short sale, they can still avoid the foreclosure process. Foreclosure is costly and complex for both lenders and buyers. The foreclosure process involves the lender appearing in court, making legal filings, and pursuing the borrower in default. Once the property is seized, lenders must take care of it like a typical homeowner would until they find a buyer.
- Saving money – Much like lenders, the foreclosure process is also lengthy and expensive for borrowers. They not only lose their house with foreclosure, but they must also pay an average of $7,500 in court fees and legal proceedings.
- Protecting your credit – A foreclosure typically stays on your record for seven years, and your credit takes a significant hit. Borrowers in foreclosure may find that it takes a long time before they can apply for credit cards, car loans, or other credit-qualifying loans, making a short sale more attractive.
Should You Buy a Short Sale Property?
Buying a short sale home may seem ideal for new investors. You can get a home under market value and then live in it or rent it out.
However, short sales are not without risk. They also often come with opportunity costs, meaning the time spent on closing the short sale may cause you to miss opportunities for other, better deals.
We believe that short sales may present an opportunity for buyers and investors. Still, the lengthy process and relying on the bank to approve the deal may make some investors choose the traditional route of real estate investing.
Regardless of the property you choose to invest in, it’s important to work with a title agency that has experience with a wide range of transactions. At Leading Edge Title of Central Florida, we have completed more than 15,000 closings—including short sales.
Whether you’re interested in purchasing a residential or commercial property, you can trust our office to get the job done right.
Call today to see how we can help!