Image of a home with a short sale for sale sign.

Buying a House Short Sale

Updated April 1, 2024 . AmFam Team

Shopping for a home can lead you down many paths. You’re likely to find homes of all types and ages while browsing online and considering your options. One type of home you may find on the market is one listed as a “short sale.” A short sale is a piece of real estate where the net proceeds gained upon selling will not cover the debts that are secured by liens, an ex-spouse or anyone else who may lay claim against the property.

In a short sale, all lien holders work together to compromise, accepting less than the full amount owed to them to recover a lesser amount. You should know that purchasing a short sale home will likely be anything but short, even with the help of a real estate professional. The process frequently lasts several months. If you’re considering a purchase of this type and are wondering how to deal with a short sale, we’ve got the short sale details you’re looking for.

The Short Sale Process

When you’re making an offer on a short sale property, you should know that there may be several competing financial groups and lienholders all working to recover funds from the seller. That can translate into a lengthy short sale process because lien holders are sometimes willing to wait and see if the other stakeholders will back down from their financial demands. So, if time is on your side and you’re in no hurry to buy a home, you may be a good candidate for a short sale purchase.

After you’ve secured your financing, it’s time to go shopping. But what is the process to buy a short sale house? We have a few helpful tips.

Identify Potential Short Sale Properties

Sleuthing out exactly where short sales are going to pop up is challenging in some markets. Because everyone’s looking to get a bargain, short sales can be in high demand:

  • Look online at real estate websites for pre-foreclosure listings.
  • Use websites to sort or filter specifically for pre-foreclosure listings.
  • Get the word out that you’re looking for a purchase of this type on Craigslist and social media.
  • If you’ve got the capital on hand, advertise with fliers, signs and classified ads stating that you’re willing to pay cash for the right home.

Check Out Public Records

Stay creative with your search. There are a lot of other buyers are looking for that diamond in the rough, too. It’s key to adjust your tactics if you want to be the first in line for a new pre-foreclosure listing:

  • Check local county courthouse websites for pre-foreclosure filings.
  • Stop by the county clerk’s office and request this info in person before it’s published online.
  • Look at the classified ads in local newspapers — both online and in print.

Check Out the Pre-foreclosure Property

Once you’ve got a few places to consider, visit the home or schedule a tour. Do your homework and get a feel for what the property’s worth. Many realty websites will list “comparable” homes after entering a target address, even when the real estate is off the market.

Do what you can to learn about the place and especially the owner.

  • Explore the area and ask neighbors about the house.
  • Run a background check on the landowner’s name to learn about criminal records, judgements and liens on the property.
  • Use the Freedom of Information Act to access court or arrest records.
  • Perform a credit check on the owner, looking for any notice of default on mortgage payments or other financial obligations.

Find an Experienced Agent

After locating a property, you’re going to want a real estate agent who knows how to buy a short sale property. The buyer’s agent should be a member of the National Association of Realtors. Add up all lienholder balances together like taxes due and outstanding mortgage balance, then subtract that figure from the estimated value of the property to see if this total outweighs the market price.

Here are a few things you should get your agent to do for you.

  • Request that they get a status on the property. Many homes in pre-foreclosure are able to resolve their financial issues.
  • Get details on the status of the sale from the trustee that listed the pre-foreclosure paperwork.

Submit Documentation to Your Lender

Your lender will want to review all the details on the home. Move quickly to get them the documents they need to make a decision on the short sale package. You should also have the following things in order before putting an offer on the house:

  • The offer to purchase the pre-foreclosure home.
  • A full and complete title search performed by a title company.
  • An inspection performed by a licensed and bonded professional property inspector.
  • An appraisal performed by a licensed and bonded professional appraisal company.

Start Negotiations

In most cases, you’re going to be negotiating with several parties. The current homeowner may or may not be able to bargain with you, so you may be working directly with lienholders. Limit your options to pre-foreclosure homes that have debt totaling at least 20 percent below current market value, per the results of the professional appraisal. Consider market trends — are home prices in the area going up or down? Use that to inform your pricing strategy and ensure a good deal.

Enjoy Your New Property

Once you’ve got a signed offer to purchase, it’s time to plan your move-in and start packing. The short sale process can be tough, but with patience and the right guidance, you can succeed.

Benefits of Short Sale

Short sales can help make the best of an otherwise bad situation. With a short sale, you’re likely to find a lower price for a home. The seller benefits here, too. They’re able to emerge with their credit in better shape, and the seller’s lienholders may benefit by recovering more funds than they’d be able to otherwise.

Disadvantages of a Short Sale

It’s clear, a short sale can be bad for the buyer. The buyer may find that the seller has worked out their financial issues and the home’s no longer for sale. Lenders may force you to accept a less-than-optimal offer, too. Is a short sale bad for the buyer? It all depends on the final outcome of the real estate transaction.

Congrats on a job well done! While you’re researching short sale purchase options, remember to get in touch with your American Family Insurance agent. They’re experts at crafting a customized policy that carefully insures your big investment. And best of all, they’ll help you understand exactly how you’re covered — and that can help you find real peace of mind.

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