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When the housing market is hot and home prices launch higher, banks have been known to loan money for more than the home is actually worth. This causes an issue for lenders and homeowners alike when the market takes a downturn and there is no equity in the house.

If you were one of the unlucky individuals who purchased a home for more than it's worth and now wants out, you may consider selling via short sale. In this guide, you'll learn what a short sale is in real estate-- and know if it's right for you.

What is a short sale?

When a homeowner owes more than the home is worth and can prove that they are in financial hardship, their lender may approve their petition to sell their home for less than the loan amount. This is called a short sale.

Say the seller bought a home for $450,000 and paid it down to $400,000. The seller than hit some hard times and tried to sell their house, only to find out the home is only worth $300,000. Because the seller cannot pay the $100,000 difference and is unable to keep paying their astronomical mortgage payment, the lender may consider a short sale. In doing this, the lender will forgive the difference between the sale price and the loan amount, but the seller won't receive any profit from the sale. Short sales do hurt the seller's credit but will help with the more immediate issue of selling the house.

Although the homeowner is getting out of their loan, don't expect a short sale to be a way for you to get a great house at a small price. The lender is actually pretty picky on how much they will or will not accept for an offer. Lenders will typically only pay the bare minimum and demand a commission discount from the real estate agents.

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Short Sale Process

If you are considering short selling your home, there is a process to follow. Failure to correctly follow this process could result in your lender denying your appeal for a short sale.

Find an Experienced Agent

First, you must find a real estate agent who is familiar with short selling homes. You want an experienced agent who has 1) listed homes for short sales before and 2) has a record of seeing the transactions to close. You don't want to work with an agent who has listed short sales that never sold, but went straight to foreclosure or was taken off the market. Lenders are hesitant to work with agents who do not have a great track record.

Prove Financial Hardship

Once you find an agent that will work with you, they'll walk you through the steps of getting approved for a short sale and selling your home. Before you can list your home as a short sale, you need to prove to your lender that you are in financial hardship. To do this, you will need to submit a letter showing your income and expenses. You'll need to show either a history neglected mortgage payments or other neglected bills. The lender needs to be able to see take a look at your assets and liabilities, and clearly see that you are unable to pay the difference.

Selling Your Home

Once approval for the short sale is given, your real estate agent will complete a comparative market analysis (or CMA) and list your home on the market. Although there will be a listing price that is advertised, the lender still must approve the buyer's offer before moving forward with the sale. This process can take months, and often goes a lot longer than a typical sale, simply because there are more parties invested in the sale of the home.

Expect there to be repercussions from doing a short sale. Your credit will take a hit and it may be more difficult for you to purchase a new property. It's always a good idea to explore all of your options prior to listing your home as a short sale.

Buying in Short Sale

From a buyer's perspective, a short sale could be the ticket to you getting a great home for a bargain price. If you're looking into purchasing a home via short sale to save money, find a different tactic. Short sales usually have higher closing costs and certain costs that are covered by many sellers won't be. More on that later, though.

Find An Experienced Agent

Most real estate agents are going to steer you away from short sales. They know that short sales are a lot more work than other closings. If you are set on going short sale, however, be sure to select an agent that has experience purchasing short sales. They'll be able to help you avoid pitfalls and problematic situations that could otherwise make it very difficult for you to close on the house. It's always a good idea to check real estate agent reviews and interview a few before landing on a specific one.

Don't Forget Inspections!

When purchasing a short sale, many buyers will hold off on inspections. Even though the repairs will not be covered by the seller, it is still important to get a presale inspection so you know what you're getting into before you make an offer.

Submit a Reasonable Offer… And Wait

Chances are if you submit a lowball offer, you're going to be waiting a long time only to have it rejected. With each offer that is submitted, the lender (and often board members!) have to review it. This process typically takes between a few weeks even up to six months! If you want to close in a reasonable time frame, your best bet is to submit a fair offer and be patient.

Short sales aren't ideal for the seller or the buyer. If you do decide to go with a short sale, your real estate agent is going to be the key to a comfortable and smooth transaction. That's why you need Clever. Our top-rated local agents know the ins and outs of short sales to help make a difficult process even easier. Call us today at 1-833-2-CLEVER or fill out our online form to get started.


Andrew Schmeerbauch
Andrew Schmeerbauch

Andrew Schmeerbauch is the Director of Marketing at Clever Real Estate, the free online service that connects you top agents to save on commission. His focus is educating home buyers and sellers on navigating the complex world of real estate with confidence and ease. Andrew has worked on projects for the United Nations and USC and has a particular passion for investing and finance. Andrew's writing has been featured in Mashvisor, L&T, Ideal REI, and Rentometer.

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