I was recently asked for my “expert” opinion in a Redfin article discussing how to buy a short sale home.

Providing these quotes is always funny to me because I certainly don’t see myself as any authority. But it was a lot of fun. Redfin is graciously allowing me to share the article here and I think it is actually helpful for those doctors potentially looking to buy their own home or are interested in or already involved in real estate investment.

If you’re beginning to look for a home to buy, chances are you’ve seen a home listed as a short sale. Purchasing a short sale home can be a good way to stretch your home purchasing budget. However, it can make the home-buying process longer and more complex.

In this refurbished post, we’ll cover the basics of buying a short sale home, including details about how a short sale works for the seller. You can also find the full Redfin article here!

What is a short sale home?

A short sale property may be authorized by the mortgage lender when the current value of a home is lower than the outstanding balance on the mortgage. For example, if a homeowner has an outstanding mortgage balance of $400,000 and the current market value of their home is $350,000 they would be short $50,000 – that’s where the term ‘short sale’ comes from.

In order for a short sale to proceed, the lender must consent to the process. They need to agree to accept less than the outstanding balance for the mortgage. This means the lender will lose money. However, they may sanction a short sale. This is to avoid the high costs and hassles involved with foreclosing on the property. Regardless of what the home sells for, with a short sale the homeowner doesn’t receive any money.

“Short sales are complicated enough in theory already. But the variability of specific market conditions, location, and lender make one-size-fits-all advice even more complicated. That said, I can absolutely recommend getting a realtor with at least five short sales under their belt. If you haven’t signed an exclusive contract with your current agent, you can find another. Consider agencies with large transaction volumes and agents with 15+ years of experience because many short sales happened following the 2008 housing crisis. However, a significant number of short sales also happened during COVID. So you might be able to cut the experience threshold down to 5+ years.”  – Robert Newman, CEO of InboundREM

What to know about buying a short sale

There are several factors to consider when buying a short sale home – including the homebuying process. Here’s what you can expect.

“For buyers, patience and flexibility are crucial in a short sale transaction. While these properties can offer significant discounts, delays are common due to lender approvals. To increase your chances of success, work with an experienced real estate agent. Ensure your financing is in order and be prepared for potential repair costs, many short sales are sold ‘as-is.’ For sellers, presenting a complete, well-documented short sale package to the lender can help expedite approval and improve the chances of a smooth closing.” – Daniel Apke, Founder of LandInvestingOnline.com

Short sale = long purchasing process

If you’re considering buying a short sale, expect the entire process to take up to a year from the time you submit an offer to when you actually take possession of the home. It’s possible for a short sale to close in as little as a few weeks. But it’s important to be realistic about the timeline.

A conventional homebuying process which involves negotiations between the buyers’ agent and the home sellers. However, with a short sale, the lender has the final say in whether or not to accept an offer to purchase.

Some expert tips…

“A short sale can be an enticing way for real estate investors to buy a property below market value. The crux is that a motivated seller who is looking to get out of their financial obligations often doesn’t have the money for repairs or maintenance, so the property could be in various stages of disrepair. Investors should remember to calculate renovation costs and other expenses to ensure a healthy return on investment before making an offer. Run your numbers and then run them again.”  – Clayton Morris, Founder, Morris Invest 

“Buyer can expect to get lower price than the market value, leading to potential savings. Few buyers compete when a short sale happens as the property sells in as-is condition, so less headache for someone who is not comfortable negotiating.

The settlement timeframe can be a bit longer. The lender must approve the offered price, which sometimes can lead to frustration. So, an offer must be subject to lender approval, which in some situations can lead to rejection or counteroffer. Hence, having a fully assessed pre-approval is very important when approaching a property under short sale.

Short sale is a good buying opportunity. But like anything else, it comes with some risks and pitfalls. So, needs to be considered carefully and should align with the buyer’s risk appetite.” – Rohit Gehlot, Principal Buyer’s Agent at InvestorAid

Making an offer on a short sale home

Once you view a short sale home you’d like to purchase, your agent will need to write up the offer to purchase to present to the mortgage lender. This offer must include a comprehensive list of comparable sales, as the lender will want to be sure the home sells for a price that’s close to market value.

“Short sales can be a great way to snag a deal. But you’ve got to go in with your eyes wide open. These homes are usually sold as-is, so a solid inspection is a must. You don’t want to find out later that you’re on the hook for major repairs or hidden liens. Make sure the place has been maintained well enough that you’re not sinking way more into renovations than you expected. If everything checks out and the numbers make sense, a short sale can be a great way to get into a property at a discount.” – Domingo Valadez, Co-Founder & CEO, Homebase

Remember, the lender will be losing money on the transaction and they want to minimize their losses

Banks only agree to sell the home as a short sale if they believe they’ll recoup more money than they would through the foreclosure process.

“For buyers, conducting thorough financial analysis is critical. Evaluate the property’s market value carefully against potential renovation costs and expected appreciation. Short sales often present attractive deals, but a disciplined value-investing approach helps ensure long-term profitability.” – Steve Fagan, Founder and CEO of Value Investing 

Once your agent submits your offer package to the bank, it can take up to 30 days for the bank to acknowledge receipt. They assign a negotiator within the next 30 days, and in some cases, add a second negotiator to the file. The bank usually requests a broker price option, or BPO. This is a simplified appraisal completed by a real estate broker who works for the bank.

If the BPO price is similar to your offer, the bank may ask all parties – you, your agent, the listing agent, and the homeowner – to sign an affidavit swearing that there is no pre-existing relationship or collusion involved in the transaction. At this point, the lender will issue a document approving the short sale, and finalize the purchase.

Pros and cons of buying a short sale house

There’s a number of pros and cons to consider when buying short sale. Let’s take a look at them:

Pros of a short sale

• Opportunity to buy a great home for less
• Less risk than purchasing a foreclosure

Cons of a short sale

• Short sales can take weeks or even months to complete
• The price may not be worth it, if the homeowner has been unable to take care of the property and it needs major repairs

“If you’re buying a short sale, understand the importance of flexibility. Expect delays and stay patient — use that extra time to dig deep into property details, title issues, and inspection reports. Short sales can offer great deal. But only for buyers who are thorough, organized, and willing to wait it out.” – Seth Williams, Founder, REtipster.com

How does a short sale work for the seller?

While each mortgage lender has their own short sale criteria, in general, lenders will consider allowing a short sale if:

• The market value of the home has dropped based on recently completed sales of comparable homes in the area.
• The home seller is close to defaulting on their mortgage. And they have no assets to cover their mortgage payments.
• The homeowner has experienced a hardship that prevents them from paying the difference between the mortgage balance and the market value. That makes it unlikely they will be able to continue making their mortgage payments in the future.

Examples of qualifying hardships include:

• The onset of a disability or life-threatening illness
• Divorce
• Job loss
• Death of one of the homeowners

“For sellers, it’s important to ensure that while you’re going through the short sale process to continuously stay current on your mortgage payments. There is a misconception that you can stop making payments to your lender, based on the notion the house is going through the short sale process. This will ultimately hurt creditworthiness, thus impacting you in other ways than just your home. You can still maintain good credit, despite a short sale if you follow this rule.” – Marcus Marion, President of Wallet Wingman

Sellers need to attest to the fact that they have fallen on hard times. This is via a letter of hardship that explains their circumstances. And this letter may need to be formatted as an affidavit along with documents to verify the facts. Don’t assume that the home seller is behind on their mortgage when they’ve listed their home as a short sale. In fact, most short sale sellers have strong credit scores and they’ve kept up with their mortgage payments. By having a short sale rather than defaulting on their mortgage, they are able to prevent any damage to their credit rating.

“When buying a short sale home, patience and due diligence are key. While these properties can be priced attractively, buyers should budget for potential repairs, as owners facing financial hardship may have deferred maintenance. Unlike foreclosures, short sales allow for property inspections and negotiation — but the lender’s approval process can be slow. Working with an experienced agent can make all the difference in navigating this complex yet rewarding opportunity.” – Thim Evangelista with the Richest Philippines

You need the right agent

Above all else, buying a short sale home requires help from a real estate agent who understands all aspects of the process. This includes how a short sale works for the seller and the homebuyer. Experienced agents can navigate the complexities of dealing with lenders, accurately assess the property’s potential value, and manage buyer expectations regarding timelines and potential hurdles. Sellers, often facing financial hardship, need agents who can effectively negotiate with lenders to approve the short sale, minimizing their losses and facilitating a smoother transaction. Experts weigh in, emphasizing that clear communication and a realistic understanding of the extended closing process are crucial for both parties. 

“Whether you are looking to buy a short-sale home for personal use or as an investment, it’s key that you have patience. The whole process will take longer than usual and you will have to work carefully with the seller’s attorney and mortgage lender. 

Be ready to share any requested financial documents. They will want to make sure that you are able to go through with the purchase – the last thing they want is for something to fall through and they are out more money than they already are. However, there is a hidden advantage here. The longer process gives you time to do more due diligence to make sure there are no hidden issues that would mitigate the benefit you get from buying a home at a relatively lower price.” – Jordan Frey, MD; Founder of the finance blog The Prudent Plastic Surgeon (that’s me!)

Could a short sale home work for you?

The answer, as I hope this post helped you find, is yes. It all really just depends on your circumstances. A short sale home represents a potential bargain.

The real bottom line is that you need to make sure it fits your criteria. Whether you intend to buy it for personal use or as a cash-flowing rental. If it does, the downsides like a longer time to purchase are pretty easy to put up with.

So, what are those criteria you should use – for a primary home or an investment property? These posts can help:

• Rent or Mortgage Your First Home? [Why I Didn’t Follow My Own Advice]
• How to Screen & Analyze Investment Properties the Right Way
• Here’s Why We Passed on a Great Rental Property
• ARM & a Leg: Why So Many Passive Real Estate Deals Got into Trouble with Variable Rate Mortgages
• 30 vs 15 Year Mortgages for Rental Properties

What do you think? Have you come across a short sale home? Did you dig any deeper? Why or why not? What are the benefits in your mind? Let me know in the comments below!