September 27, 2021
Real Estate Short Sales Explained: What You Need to Know
Written by: Ruben Izgelov
This guide is intended to break down the complexities of buying short sales in real estate for investors.
While it’s up to you to decide what to offer on a short-sale property, this guide will explain everything from the definition of short sales to the advantages and disadvantages of the investment itself. Keep reading to find out more!
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What is a Short Sale?
Have you found yourself Googling, “what is a short sale in real estate terms”? Well, we’re here to explain exactly what they are.
This real estate term is used to describe what happens when a homeowner decides to sell their home for less than the mortgage value. This is usually because they find themselves in a position of financial difficulty and are struggling to keep up with mortgage payments.
Short sales are often an attempt to avoid a foreclosure, which is what happens when the lender forcibly repossesses the home.
A homeowner is selling their home for $225,000 when there is still $250,000 left on the mortgage.
The difference (minus the closing costs and other costs of selling), is $25,000. This is called the “deficiency.”
Real Estate Short Sale Process For Buyers
Before any purchase can be made, the mortgage lender — in most cases, a bank — must approve the short sale. For banks to approve a short sale, they will generally require documentation explaining the reasoning behind the short sale.
In order to help them determine whether or not to approve the short sale, banks will often conduct a BPO. If you’re wondering “what is a BPO in a real estate short sale?” you won’t be the only one.
BPO stands for Broker Price Opinion. It’s something banks often solicit to help them determine the market value of the home in question and try to offset any possible losses.
If the short sale is approved, then the deficiency (or difference) is either forgiven by the lender, or a “deficiency judgment” is obtained. This requires the borrower to pay back part of, or the entire deficiency, to the lender. A deficiency judgment is obtained via a court ruling.
Advantages of Investing in Short Sales
1. Less Risk than Foreclosures
In most cases with a short sale, homeowners continue to occupy the property until it is sold. This means there is less possibility that the home will be sold in a neglected state.
When buying foreclosure homes, on the other hand, there’s a possibility they could have been vacant for quite some time. This could mean that some repairs are needed, which could ultimately end up being costly for the buyer.
To navigate the risks of buying foreclosures, read our guide on using a private lender to buy foreclosed properties at auction.
2. Good Opportunity for a Bargain
Homeowners looking to conduct a short sale of their property are often eager to sell it as quickly as possible. This creates incentive for them to put their home on the market for a cheaper price, so that it will get purchased quickly.
So if you’re still asking yourself “should I buy a short sale property?” If there's any reason to go for it, it’s because you might come away with a good deal.
What’s more, if you’re a cash buyer or prepared to put down a large down payment, you’re more likely to secure the short sale. Your other option is speaking to an experienced private lender - such as We Lend. We can get you the funds for your short sale in under a week.
3. Less Competitive Than Buying a Foreclosure
In comparison to foreclosure auctions, which can often be highly competitive for real estate investors, there is less interest for short sale properties in general. This means that your chances of making a successful short sale purchase are high.
The reduced levels of interest on short sale properties are mostly due to the disadvantages of the process, which we’ll get into next.
Drawbacks of Short Sale Investment
1. Length of Process
As we mentioned in the introduction, investing in a short-sale property can often be a lengthy process.
Short sales can take anywhere from a few months to a year or more, which means that as an investor, you could miss out on other opportunities in the meantime while you’re tied up in the short sale project.
2. Short Sales Must be Approved By Lender Beforehand
Before any short sale can go ahead, the homeowner must seek the mortgage provider or lender’s approval first. Lenders could either accept, counter, reject, or ignore the homeowner’s offer.
The process of seeking lender approval may take a long time as some banks are notorious for moving at their own pace.
How to Find Short Sale Properties
Like with all real estate bargains, you need to be able to track down these types of properties in the area you’re planning to invest in, before someone else swoops in! To help you, here are a few tips on how to purchase short sale property:
- Real estate websites: look for real estate agents that hold a Short Sales and Foreclosure Resource (SFR) certification, which means they are specifically trained in this area of real estate.
- Sit tight: after speaking to real estate agents — as with searching for foreclosure homes — you could also do a drive-by and speak to homeowners yourself. However, you must be prepared to exercise a lot of patience! This process could take a while.
Learn where else you could find properties by reading our blog on where to find and flip houses
WE LEND OFFERS A RANGE OF PROGRAMS TO SUIT EVERY TYPE OF RESIDENTIAL REAL ESTATE INVESTOR.
We hope you’ve learned something from reading our guide to short sale properties. As we mentioned previously, you are the only person who knows what to offer on a short sale property as the investor.
But based on the advice we have given you, we hope you now feel better equipped to make that informed decision for yourself.
Looking to fund a real estate short sale? Get in touch with We Lend today and get the funds needed in 3-7 days.
Ruben is Managing Partner at We Lend LLC. With over a decade in the real estate industry – acquiring, flipping, developing and financing over $500 million worth in real estate – Ruben has quickly become a renowned real estate expert, speaker, and guide for many professionals in the industry. The most successful time...