It’s likely that during your real estate research, you came across the phrase “short sale” or “short pay”.

What is a Short Sale?”

A Short Sale or Short Pay is a type of real estate sale. It is not a foreclosure nor is it an REO. When a homeowner (borrower) is behind on their mortgage, sometimes the lender will allow the buyer to do a short sale. When you buy a short sale, you are buying it from the borrower, not the bank. However, the big catch is that you buy it SUBJECT TO THE BANK’S APPROVAL.

Short sales can be a steal, but not always. It’s possible that the value of the home does not exceed the outstanding debt balance on the home. In other words, the property is worth less than is owed on it. For example, there may be a property that is worth $350,000 today, however, twelve years ago, that property could quite reasonably have been purchased for $500,000 with a loan of close to $500,000. Loans amortize slowly, so today that $500,000 loan is still, almost $500,000. Only now, the property is only worth $350,000.

As a result of the bank being owed more than the home is worth, they get the right to approve the sale. Once an offer is obtained, it is submitted to the bank for approval. If the bank approves the sale, escrow can be opened and the sale can be completed. If the bank rejects, as a result of getting perhaps $332,500 (a $350,000 price minus 5% for commissions and closing costs) on an almost $500,000 outstanding loan, the home remains on the market.

The home will remain on the market until an offer is accepted by the bank or the bank decides to foreclose on the homeowner. When the bank forecloses, the property either sells at a trustee’s sale or it becomes REO (Real Estate Owned); which we will cover in the next chapter.

Pros of Buying a Short Sale

  • Price – Short sales can be an incredible value. They are difficult to get. Often times, this is factored into the price. Short sales can be priced well below market value.
  • Property Condition – Most often the property owner is still living in the home so the property is not sitting vacant, like in the case of an REO. While short sale owners might not take the greatest care of their home, they will at least prevent things like leaks, plumbing, or electrical problems because they are living there. If the home was an REO, these things would sit unnoticed until a bank or broker got involved.

Cons of Buying a Short Sale

  • Time – Short sales are subject to bank approval which means the process can take months. Short sales are known to drag on for several months and still fall apart.
  • Second Mortgages – Some short sales have second mortgages on top of the primary first mortgage. The second mortgage lender must also approve the short sale. This can double the complications and time lines associated with buying a short sale.
  • Other Liens – When dealing with a short sale there can be other liens (money owed) on title such as tax liens, HOA liens and mechanics liens. These will need to be paid before the home can be transferred. Either the bank or the buyer will need to pay for these.

Still Considering Buying a Short Sale?

If the cons didn’t outweigh the pros for you, there are still some things you need to consider. First and foremost, work with a real estate broker. Not just any real estate broker, an actual short sale specialist. A short sale specialist will be able to help you research title ahead of time and find out if there are any hidden liens.

Tax liens are very common, and if a homeowner is behind on the mortgage, they probably stopped paying the property taxes too. Property taxes are anywhere from 1-1.5% of the value of the property annually. If the taxes are 2-3 years delinquent, this amount could be 10s of thousands of dollars.

Just like with property taxes, the homeowner probably stopped paying HOA dues too. HOA dues range anywhere from as low as $40 per month for a single family home in an HOA to as much as $1,000s per month for high end HOAs with lots of amenities and services. It is safe to assume that HOA dues could be 2-3 years delinquent.

If the homeowner did any major renovations to the home, there could also be money owed to the contractor who performed the work. These liens are called mechanics liens.

Most importantly, your short sale specialist will find out which lender(s) is (are) involved. Short sales are dependent on the relationships with the bank. If your real estate broker knows the lender, that can be a huge benefit. They can hopefully help convince the bank that this short sale is the best path towards getting the most of their loan back. Unfortunately, no short sale specialist can guarantee success with short sales.

Now that you’ve considered buying a short sale, what about an REO?

➡️ Chapter 31: Should I Consider Buying A REO?