How a short sale works
A short sale happens when, for whatever reason — financial hardship, job loss, or a drastic real estate market downturn — the amount a homeowner still owes on their mortgage is more than what their house is currently worth. The home is sold at fair market value, with the bank accepting a loss—in essence, coming up “short” on the sale.
So, once it’s established that a short sale is the best option given the circumstances, it’s time to get down to business and start the process.
First, that means a seller will need to start finding a buyer, by listing their short sale home on the multiple listing service (MLS). Then, the buyer and seller will have to agree on a realistic offer price to submit to the bank.
Next is the waiting game. If you thought this was going to be a speedy process, this is when your patience will be tested. At best, the bank could sign off on a short sale application within weeks, but it could take as long as several months.
Luckily, a top-notch, experienced short sale agent like Bell Air South, Maryland-based Laura Snyder, can craft an offer with fail-safes in favor of the buyer’s best interests.
Snyder explains that one thing she puts in her short sale offers helps protect buyers’ costs and time spent. “On the third-party approval addendum, you can give a specified time that you give the bank to respond with a short sale. The minimum number of days is typically 30,” she notes. “A lot of times, they’ll ask for more — maybe 60 or 75 — just to get the short sale approval.”
You’ll also have to think about securing the lender’s approval on the deal before you pay for an inspection and your mortgage rate lock expires, in addition to other timeline management issues that your agent can help you understand.
Additional contingencies that will support a beneficial short sale contract for the buyer include the condition of the property, the appraisal, and the financing.
Again, these are just a few reasons why working with a qualified real estate agent is critical to a successful short sale purchase.
Because short sales are up to the bank’s discretion based on strict criteria, the buyer and seller will need to finalize an offer that works for everyone — most importantly the bank — and that requires a careful strategy.
So, that begs the question: how does the buyer know which price is right for everyone involved?
Researching the seller’s mortgage debt before making an offer
Before making an offer on a short sale, it’s a wise move to know more about the seller’s mortgage status. This helps you gauge whether the lender is likely to approve your offer and how much negotiating room you have. Here’s how to research the seller’s mortgage debt:
- Check public records: Many counties have online databases where you can look up mortgage details, liens, and foreclosure notices. This can give you a general idea of the outstanding debt and whether the home has multiple loans attached. Knowing this information helps you determine if the short sale is feasible or if lender approval will be complicated.
- Ask the listing agent: The seller’s real estate agent may be able to provide mortgage information and whether the lender has already agreed to a short sale. While they may not disclose everything, they can offer insights into how far along the short sale process is. A cooperative listing agent can be a valuable resource in crafting a realistic and competitive offer.
- Look for multiple loans: If the seller has a second mortgage, home equity loan, or any other liens, multiple lenders will need to approve the sale. This can make the process longer and more difficult, as each lender will want to minimize their losses.
Understanding these factors ahead of time can help you decide if the home is worth pursuing or if you should adjust your offer strategy.
Setting a winning offer price
By now, you have a lead on a short sale home. Awesome! Now what? It’s bidding time.
You can find a short sale home anywhere you’d find any other home listing, most likely on the MLS. The property must be listed through a real estate agent, designated as a short sale, and usually labeled “pending third-party approval” with an as-is clause. So it’s a very specific listing.
If the listing is on a site that anyone can access, it may or may not include an asking price. This can help you determine a fair market value.
The best place to start is for your agent to conduct a comparative market analysis (CMA), which uses comparable recently sold homes, also known as “comps.” A CMA will evaluate similar homes in the same area as the short sale listing and the price they sold for. Comps account for features like square footage, number of rooms, the neighborhood, the age of the house, and its amenities, ideally adjusted using regression analysis to reflect differences between the homes, to determine a concrete value.
If the short sale house is on the MLS, it will be listed with the seller’s asking price. Typically, this price will be at varying levels below the market value. How low the price is depends on how long it’s been on the market and how many offers it’s received.
