Short Sale Homes

After the rise and fall of the real estate bubble, short sale went from being an obscure term to an everyday phrase. But even with everyone and their paternal great-aunt talking short sales, questions and misconceptions abound.

• What is a short sale?
  Simply put, a short sale is a home that someone is trying to sell for less money than they owe on the mortgage. This means that even if the sale is successful, the seller will still not raise enough money to fully pay off the mortgage.
  
  
• Why would a homeowner choose a short sale?
  Nobody sells their home via short sale for the fun of it. Usually, it's become clear to the homeowner that there's no way to stay ahead of their mortgage payments. This may be because the owners fell on hard times, over-borrowed when they bought the home, or took out home-equity loans that put them too far into the red to recover. In any case, a short sale is usually a last-ditch effort to prevent foreclosure.
  
  
• Why do banks allow short sales?
  Sometimes they don't. A homeowner must get bank approval in order to go ahead with a short sale. If the owner has multiple mortgages against the home, then that means approval from multiple lenders. Adding to the complication is the fact that some lenders get "dibs" on repayment before others, meaning that secondary lenders might recover far less of their loaned-out money than lenders who are first in line. When banks do agree to a short sale, it's because it represents their best chance of recovering as much of their money as possible as quickly as possible.
  
  
• How many people have to approve a short sale?
  Generally, anyone who has a lien on the property must approve a short sale before it happens. The lenders who issued the mortgage loan are the most obvious lien holders, since their money financed the purchase. But other lien holders can include local governments (for unpaid back taxes or fines), courts, credit card companies, repair companies, contractors, service providers, utilities -- basically anyone to whom owner owes money, including private lenders.
  
  
• Do I need the home owner's approval, or just the approval of the lien holders?
  Both. The home owner will need to approve your offer first, and will then submit your offer to the lien holders. If any of the lien holders turns down your offer, the deal is off. If all of the lien holders approve, the sale will proceed. This approval process is what makes short sales such a lengthy process, because each lien holder must figure out if they stand to recover more money by allowing the short sale, or by foreclosing on the owner.
  
  
• How long does it take to buy a short sale?
  It can take much longer than a typical home sale -- up to 120 days in some instances.
  
  
• Are short sales always a great deal?
  Think about it: Joe Shortsale is trying to sell his house for less money than he owes to three different banks. Are those banks going to be eager to let him sell it for dirt cheap? Probably not. Sure, it's possible to get a good deal on a short sale, but it's no guarantee. And remember, if you see a good deal on a short sale, you'll have plenty of company from other potential buyers.

For more information and discussion of short sales, see what people are saying in our forums.

Short sales, like the majority of homes for sale, are listed with the MLS. Unfortunately, they're not always marked as short sales, meaning you might need to do a little hunting to find what you're looking for.

You can look for short sales on Redfin.com by including specific remarks in your search criteria. Just click More Options near the search box at the top of the map. In the middle column, you'll see a blank labeled Remarks. In that blank you can enter any or all of the following phrases, separated by a comma, which are commonly included in the comments on a short sale listing:

Before searching for these terms, make sure the Exclude short sales option at the bottom of the middle column is not selected.

The website RealtyTrac also offers users the ability to search for short sales.

Touring short sales is pretty much like touring any other listed home. You can work with your agent to arrange a tour, or attend any open houses being held by the listing agent. Redfin can help you tour and purchase short sale homes. Read more about how Redfin handles short sales.

Interested in making an offer on a short sale? Here's what to do, and what to expect:

1. Talk to your agent: Not every agent has short sale experience. Before you make an offer, you should talk to your agent and make sure he's up to the task. Has he handled short sales before? If so, how many and how recently? If your agent is inexperienced with short sales, you may want to end your working relationship to find a short sale specialist.
2. Get your finances ready: You're not just trying to show the seller that your finances are in order -- you're also trying to convince one or more banks and other lien holders that it's worth their time to consider your offer. If a bank suspects that your offer might fall through due to lack of financial readiness, they'll kill the deal without a second thought.
3. Make your offer, and wait: Once you make your offer, it will need to be reviewed by at least one and possibly several different lien holders, all of whom care only about their bottom line. You might wait months without hearing anything, then receive nothing but a flat refusal. The process isn't for everyone.
4. Do your homework: Don't forget to have a thorough home inspection, and to be sure to include contingencies in your offer that will protect you in case something in the deal falls through:
• An inspection contingency will let you exit the purchase if your inspection discovers a serious problem with the home.
• A financing contingency will protect you in the even that your loan approval falls through.
• A bank approval contingency allows you to back out of the deal if the seller's lien holders do not approve of the short sale.
• If you're a current home owner, a sales contingency allows you to exit the purchase if you cannot sell your old home. However, banks may reject an offer with this contingency; the risk of the deal falling through may be too great for them.
5. Be ready for failure: Not to be blunt, but many short sale deals fall through. A survey by the California Association of Realtors indicated that short sales have a nearly 40% failure rate, even for deals with qualified buyers.
6. Be ready to succeed: Just as importantly, if your offer is accepted, you need to be ready to move fast. Banks have no problem making you wait months for their approval, but once it's given, they'll expect you to complete the deal on their timeline.

We mentioned above that short sales are not a "slam-dunk" good deal. Many short sales can fall through because the seller's lender isn't satisfied by the terms, or refuses to accept the necessity of a short sale at all. This is where a hardship package comes in.

A hardship package is basically a stack of paperwork that documents the seller's current financial difficulties. A thorough hardship package makes a short sale much more likely to succeed.

What's in a seller's hardship package? Requirements may vary from bank to bank, but usually include:

Remember, this is all paperwork that the seller needs to supply, not you. If you make an offer on a short sale and it's approved, you'll need to provide proof of your loan approval to the seller's lender and lien holders.

Some of the documents in a hardship package will be produced only after you make an offer. But all of the paperwork showing the seller's financial difficulty should be ready and complete beforehand. If you're going to make an offer on a short sale, make sure the seller has already put together a hardship package.