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What Is a Short Sale?

Updated: Sep 7, 2023

In the course of looking for a dream home, prospective buyers will often hear the term "short sale." No, it does not mean you can move in right away. A short sale refers to the owner of the house being willing to sell the house for less than its market value.

A short sale can potentially be a good deal, but there are a number of things to watch out for before getting too excited about the "bargain" in the perfect neighborhood you’ve been longing to move into.


Why a Short Sale?

A short sale is usually triggered for one of three reasons:

1) They don’t care about the money so much as getting rid of the property because they don’t want it any more.

2) They want to get rid of it quickly because they are paying two mortgages.

3) The house is in foreclosure due to them not paying their mortgage, and the bank wants their money.

The third reason is the most common. But why would they take less than the house is worth when they clearly need the money?

The Pressure Is On

If the bank is moving to foreclose on the home, they might be willing to accept a smaller sum than the current valuation of the house to end that mortgage and get that bad debt off the books. But just because you offer the short sale price does not mean the mortgage lender will accept it, no matter how eager the seller might be.

In some cases the lender might actually look for a short sale even if the sellers have been keeping up their mortgage. They may have a poor credit score and/or credit-to-debt ratio. They might also owe more on the mortgage than the house is worth, a so-called "underwater mortgage." The lender is therefore taking steps to bring the value of the house in line with what the market will bear for that size of house in that neighborhood.


Do Your Research

Fortunately, these days there are websites like Zillow and Trulia to help you research homes you might like in neighborhoods you wish to live in. Pay particular attention to the details about what homes have sold in the area recently, and what was paid for them.

Once you have a good idea as to whether or not the short sale terms you have seen are a bargain, find out who is handling the sale and/or go to a local realtor who seems trustworthy. They should be a member of the National Association of REALTORS® and seem like a person you can get along well with, because the process of buying a house can be long and complicated, and can take from three months to a year depending on what you are looking for and how soon you need it.

Your realtor will be able to dig a little deeper to find out who owns the title to the house, whether or not the house is being foreclosed upon, and how much is owing. They can also find out if there is a second mortgage, a refinance filed for, or any back taxes owing. A lender will not accept a short sale if there is no equity (money paid) in the home, because they will not be able to get any money back.


Home Inspection

Even if all the lights are green for go after your realtor does their research, and the lender appears willing to work with you, don’t be hasty. Ask your realtor to recommend a reliable home inspector and ask that they attend the inspection too in order to make sure nothing gets missed. Then they can negotiate on your behalf to ensure the deal really is as good as it seems.







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