What Is a Short Sale?

Short sales aren't as simple as you might think.

Short sales can be viewed either as a good investment or a bad transaction — depending on who you ask. Many experts advise against short sales altogether, whereas others may deem them good opportunities.

A universal real estate truth, however, is this: Buying a short sale can be complicated. Although short-sale prices can appear to be quite the bargain, it’s important to understand how the short-sale process works under the direction of a real estate professional. Ultimately, whether you should buy one depends on your specific situation and if the process is worth your time.

Here’s a quick look at what you’ll find in this guide to short sales:

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What Is a Short Sale?

A short sale is the sale of a real estate property for which the lender is willing to accept less than the amount still owed on the mortgage. In simple terms, the seller is “short” on the cash needed to fully repay the lender.

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Two requirements must be met to determine whether the sale can be considered a short sale. First, the homeowner has to be so far behind on payments that catching up with them is no longer feasible. Next, the property has to be in an area where the housing market has nosedived so that the house is now worth less than the remaining balance on the mortgage.

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How Does a Short Sale Work?

Ultimately, the short sale process occurs because the lender is actively trying to avoid foreclosure. It doesn’t really have much to do with trying to rid itself of the property.

While that might sound easy enough, the complication begins once you make your offer. Just because the property is listed as a short sale, it doesn’t obligate the lender to accept your offer — even if the seller accepts it.

Plus, the short sale process is complex and time-consuming. For example, the home seller must file several forms and documents with the mortgage lender, which includes a letter explaining the hardship and why repayment of the loan is not possible. The bank then must review the application, perform an appraisal and either approve or reject the sale request.

Check Out: The Secret Trick To Becoming a Real Estate Mogul for Less Than $10,000

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What Is the Difference Between a Short Sale and a Foreclosure?

The difference is in which party gets the ball rolling. In a short sale, the homeowner is the one who initiates the process. In these instances, homeowners usually believe that they are so far behind on mortgage payments that they will never catch up.

A foreclosure, however, is initiated by the lender. The bank takes ownership of the home after the buyer is unable to make payments. Additionally, in most foreclosure situations, the homeowners have already abandoned the property. But if they have not, the bank will evict them during the process.

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Why People Purchase Short Sales

People love getting good deals, and a short-sale offer could look appealing on paper. The allure lies in both the reduced price and less competition for a home. The idea of something being too good to be true often plays very well into the concept of short selling, however.

Real estate experts believe it’s a common misconception that just because it’s a short sale, it’s a good idea. This was true back in 2009 when economic turmoil hit, causing home valuations to tumble and making it easy for house flippers to turn a profit. Now that home values have increased, however, the difference between the purchase price and the post-renovation selling price doesn’t really yield that much return.

See: The Best and Worst Cities To Own Investment Property

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What Does a Short Sale Mean for the Buyer?

When considering a short-sale purchase, it is important to understand why the property is being sold as such. Doing your research and consulting with a real estate professional — preferably a short-sale expert — should be the first thing you do before making an offer to purchase.

Research can include checking public records, as well as having your agent find out who is on the title, whether a foreclosure notice has been filed and how much is ultimately owed to the lender. You don’t want to blindly make an offer if you’ll end up losing money in the long run.

Also See: The Housing Crisis Is Officially Over

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Finance Options for a Short Sale

After concluding your research and determining that a short sale is the direction you want to go, you must figure out how to pay for the property.

Where you lie on the credit risk scale will determine if you’re eligible for financing. If possible, however, paying cash might be the best option because it is not uncommon for the lender to want to close in as few as 20 days — a time frame that leaves little room for obtaining a mortgage.

FYI: Tips To Get Your Mortgage Payments as Low as Possible

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When in Doubt, Consult the Experts

Both buyers and sellers in short sales need to speak to real estate professionals before trying to make a go of a short sale. And because short sales can create all kinds of tax, ownership and debt issues, it’s also wise to consult with a real estate attorney.

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Overall, a short sale is no walk in the park. If this an option you are seriously considering, it is important to weigh the pros and cons before investing in the process and the property. If you want to buy a short-sale property, the more details you are able to gather before revving up for a lengthy and complicated process, the better your chance of completing the deal.

Click through to find out eight insider tips to get rich in real estate, so you can increase your bottom line.

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This article has been updated with additional reporting since its original publication.

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