Step-by-Step Guide to Buying a Short Sale Home in 2024
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
Note: This article explains the process for real estate investors looking to buy a short sale property. If you are a homeowner considering to short sell your home, read our other two guides A-to-Z Short Sale Guide for Homeowners and Step-by-Step Short Sale Process for Home Sellers.
“Patience is bitter, but its fruit is sweet.” – Aristotle.
What Does Buying a Short Sale Home Mean?
A short sale is a sale of a property that is worth less than the outstanding mortgage amount. Such a property is called an “underwater” home or a house whose owner is “upside down” on their mortgage. The owner who wants to do a short sale must first ask for the lender’s approval. A short sale can be approved if:
- The owner is behind in their mortgage payments.
- The house is “underwater”.
- The owner can prove they are experiencing financial hardship.
A short sale takes longer than a regular real estate transaction. It also involves much paperwork and communication with the lender. But it’s doable and in many cases beneficial for the buyer: short sales typically have a high chance of selling at a discount, especially when the subject home needs extensive repairs.
Below you’ll learn the step by step process on how to buy a short sale property.
How to Buy a Short Sale Property: 8-Step Process for the Buyer
1. Find Out if the Asking Price Is “Lender Approved”
Asking the listing agent if the subject home’s listing price is “lender approved” will save you a lot of time. Oftentimes the bank’s initial appraisal comes in way over the property’s actual value. In these cases, it may not be worth your time to complete an offer package.
2. Write Your Offer
The offer must be written on an official purchase agreement template, approved by the Realtor commission in the applicable state in which the subject property is located.
3. Obtain an Updated Proof of Funds Letter or Bank Statement
The next step is contacting your financial institution to obtain an updated proof of funds letter or bank statement.
The proof of funds letter or bank statement should not be any more than 30-60 days old, depending on the short sale lender’s requirements.
It is very important that the name or company listed of the proof of funds letter matches the buyer’s name/company on the purchase agreement! If the buyer’s name on the proof of funds and purchase agreement are different, the bank will reject the offer.
If you are purchasing the short sale in an LLC or various corporation, you must submit all corporation documents for the business. This includes, but is not limited to, the articles of corporation, EIN letter, and certificate of organization.
4. Put Together a Preliminary Settlement Sheet
Every bank in a short sale situation will require a preliminary settlement sheet to be submitted along with the offer. Their reasoning is simple: the lender needs to see what they will NET from your offer. The pre-lim hud shows them all seller-side expenses they are being asked to pay.
Do not take the lazy route! Time and time again buyers put “estimated” figures on the preliminary settlement sheet. These numbers are gathered from whatever information is available to them online (county website, tax records, etc.).
The short sale lender is making their decision based off what they will NET. Therefore, the seller-side information on the pre-lim hud must be accurate. If the numbers from the actual title report differ from what you submitted them originally, the offer runs the risk of being rejected.
If you’re fortunate enough to have a professional short sale processing company facilitating the transaction, they will put together the pre-lim hud for you by leveraging their relationships with state-specific title companies. Learn more about who short sale processors are and how they work from my article “What Does a Short Sale Negotiator Do for the Seller?”.
If you’re in a situation where the buyer themselves needs to provide the pre-lim hud, it is highly recommended to first purchase a title pull down (primary owner search). The title company will then use this information to complete the pre-lim hud. Remember: Accuracy = time saved.
The estimated turnaround time is 5-7 business days for the title pull down, then 1-2 business days for the preliminary settlement sheet. Obviously this depends on many factors, including the title company, county lien searches, etc.
5. Compile Supporting Documents for Your Offer
If a direct homeowner is motivated and has equity, striking a deal can often be done quickly over the phone.
Be aware! Banks are not the homeowners who you are used to dealing with.
Typically, they are not knowledgeable on the local market conditions, nor do they care to be.
The short sale lender will get their “as-is” value of the home by ordering a third party appraisal. This will be conducted by a licensed real estate appraiser or a local real estate agent, in the form of a Broker’s Price Opinion (BPO).
This value will play a vital role in determining whether or not your offer will be accepted.
It’s crucial for you to submit documentation that supports your offer. In other words, you must “tell the story” to the bank of how you came up with your offer price.
Common supporting offer documentation includes:
- Written repair estimates from a licensed contractor (if the home needs rehab or cosmetic updating).
- Proof of change in zoning (for instance, if the home changed from multi-family to residential. This affects the value and should be pointed out to the bank).
- Deed restrictions that have a negative effect on value.
- Settled “as-is” comparables in the area.
6. Submit Your Offer Package to Listing Agent… and Wait!
There is nothing “short” about short sales!
As noted in this article’s introduction, for this property investment strategy patience is the key.
Hopefully, the seller will have hired a professional short sale processing company to facilitate the transaction. The follow-up systems in place will hold the lender accountable for their timelines.
During the waiting period, the lender will order the third party appraisal and collect any loose documentation still required from the seller.
7. Third Party Appraisal Results Are Back!
The short sale lender will either accept your offer or counter you. The decision is based off a combination of the third party appraisal results and their estimated NET from your preliminary settlement sheet.
If they counter, you’ll have the option to complete and submit a “price dispute” within an allotted time period.
Every lender has their own specific requirements for completing price dispute packages.
Generally speaking, here is what you’ll need to send in:
- 3 settled comparables within the last 180 days and 1 mile radius.
- Written contractor’s estimate or repair sheet.
- Pictures of all damages/work needed to the home.
8. Short Sale Approval Letter Is Issued
Congrats! The lender approved your offer!
Within around 3-5 business days, you’ll receive the official short sale approval letter. The letter will contain all of the information and terms of the sale.
Read the entire letter carefully, but focus on these main points:
- Purchase price
- Short sale approval expiration (date you must settle by)
- Number of days you must wait to re-sell the property.
How Long Does It Take for a Short Sale to Close?
Based off of studies and experiences from the short sale processing company Universal Short Sales, the average time a short sale takes to close is 2-5 months. However, a short sale that is not professionally processed can take up to 6-12 months.
It’s easy to get frustrated if you are taking on your first short sale unprepared: “Our home listing featured such gems as “pre-approved for quick closing” and “one percent closing costs allocated,” both of which turned out to be pipe dreams.” — says Adam McFadden, a DIY enthusiast about his first short sale experience. — “There are endless delays. Sellers ask for more time. Banks reconsider their approval. Addendum items get argued over. It goes on and on.”
Be mentally prepared to complications and make sure you have a sufficient time reserve. It is very important to note: the duration of the short sale process is highly dependant on the complexity of the file.
If the short sale is processed correctly, the seller’s short sale paperwork should be processed by the time the buyer submits their offer.
Properties that have just one primary lender defaulting against it, along with no other liens, will typically close in a shorter time frame.
Completing the short sale within the 2-3 month time frame will also depend on the offer presented on the home. This is influenced by two specific factors:
- How fast an offer is received: the best case scenarios involve the listing agent selling the property quickly or bringing a qualified buyer to the table immediately.
- How strong the offer is: “low ball” offers without any basis are typically denied by the lender. This wastes the valuable time of all parties involved and prolongs the short sale process.
Let’s take a look at this example of a short sale that would experience a quick turnaround time:
John (borrower) is defaulting on his mortgage payments with TD Bank. He is about two months behind, underwater on his loan, and decides a short sale is the best route to go.
The listing agent assigned to the property has a buyer ready to make a strong cash offer on John’s property. TD bank’s mortgage is the only lien against the home, so the Lender doesn’t have to worry about satisfying any other debt.
In addition, the borrower hired a third party short sale processing company to process the short sale file, at no charge. Due to the expertise of the processing company, the supplementary offer documentation that usually causes delays is addressed in a timely fashion. As a result, the short sale is approved and executed quickly.
Properties that have multiple mortgages against them can cause delays in the short sale process. In these cases, the lender in a primary lien position will approve the short sale, then make the secondary lien holder an offer to “settle” for a certain amount to satisfy their debt. The lender in the secondary note position will either accept or counter the offer of contribution.
Here is what a short sale negotiation between a primary and secondary note holder usually looks like:
Tom is attempting a short sale on his home, which contains two loans in default (primary and secondary). The primary lender is TD Bank. The secondary lender is Wells Fargo. TD conditionally approved the short sale and offers Wells Fargo $3,000 to settle, even though Tom’s loan balance with them is around $20,000.
The secondary note holder counters TD’s offer with a $6,000 contribution towards the balance. After some back and forth, the two banks agree to a $4,500 contribution to the secondary loan holder. The negotiation between the primary and secondary lenders added about 4 weeks to the short sale timeline.
Short Sale Timeline for the Buyer
So, you are a buyer who found a great deal on a short sale… Nice work! Now the fun begins!
Here are the steps you should expect next:
1. Your Real Estate Agent Writes Up a Complete Offer: 1-2 Business Days
I cannot stress the word complete any stronger. The lender will relay the offer documentation needed on a per deal basis. At a minimum, the offer MUST contain the following documents:
Signed Purchase Contract
Make sure the buyer and seller’s name and addresses are listed. Contracts get rejected for missing information all the time.
Buyer’s Updated Proof of Funds or Pre-Approval Letter
Lender must be able to verify the financial capabilities of the prospective buyer.
Buyer’s Corporation Documents (If Applicable)
New short sale buyers often give push-back on this. Providing the lender with your LLC documents is not negotiable and will just waste time, should you choose to put up a fight.
Preliminary Settlement Sheet
The lender will use this to analyze their NET income from the proposed offer, and therefore determine their acceptance or counter of said offer.
It is strongly advised to have your title company generate a title pull down report (first owner’s search), then use the information from the report to complete the preliminary settlement sheet. All too often buyers take the “easy road” and fill the pre-lim settlement sheet with data found on county sites, tax assessors office, etc.
Incorrect or missed information has the potential to kill a deal in the end. A good short sale processing company will have the title company partnerships and resources to complete this part for you.
2. Level 1 Lender Review Submission: 3-10 Business Days
Once the seller executes your offer, the short sale processing company submits it to the lender for review. The first level of lender review is document collection and revaluation.
In this phase, the bank is simply ensuring the offer package has everything it needs, before it gets submitted to underwriting. If any documents are missing or need correction, they will send it back. Once the bank verifies the offer package is good to go, they will ship to the underwriting department for second level review.
With the proper follow-up systems in place, the estimated timeline for this step will be 3-10 business days.
3. Level 2 Lender Review: 7-30 Days
Second level offer review takes place in the bank’s underwriting department. This is where the offer and NET income is actually reviewed and a decision is made.
The most crucial part of this step is the third party appraisal. The Lender orders this either in the form of a BPO (broker price opinion) or professional interior appraisal. The results of the appraisal will have a significant impact on the acceptance or denial of the prospective buyer’s offer.
By law, the bank has up to 30 days to make a decision on the offer. However, with the proper follow-up systems in place, the estimated timeline for this step will be 7-10 business days.
4. Short Sale Approval Letter or Counter Letter is Issued: 3-5 Business Days
Once the review process is complete, the bank will issue a short sale approval letter (if the conditions meet their requirements) or a counter letter. If the bank issues a counter offer, it generally stems from the third party appraisal results.
If the buyer disagrees with the appraisal, he or she can submit a price dispute. Every lender has a specific process for price dispute packages, but generally here is what you will need:
- “As-is” comparables
- Contractor repair estimates
- Pictures of damages / areas of despair
Pay attention to the expiration date! On the short sale approval letter, the bank will give you an expiration date. This is the last day you have to close on the property. Obtaining an extension is possible, but its a real headache! It is highly suggested doing everything possible to settle on time.
5. Settlement Day: 1 Business Day
Enjoy the fruits of your labor and patience!
What a Short Sale Means for the Buyer: Pros and Cons
A prospective short sale buyer should be aware of the pro’s and con’s that come along with the purchase.
Below, I’ll list two important advantages, as well as two disadvantages.
Advantages of Buying a Short Sale Home
The first advantage of buying a short sale includes the potential of getting a good deal. The word “potential” is important here. If the third party appraisal segment of the short sale is processed and handled correctly, the purchaser may be able to obtain the property at its “as-is” value, less repairs. This may result in a very profitable wedge deal!
The second pro of purchasing a short sale is a hidden gem, which comes in the form of “seller assist.” If the prospective buyer is using bank financing to acquire the house, the short sale lender is more likely to approve a credit towards closing costs. This equals lots of savings for the purchaser! In fact, if he or she is an investor, it will result in a higher cash on cash return!
Disadvantages of Buying a Short Sale Home
The first disadvantage that comes to mind when buying a short sale is the most prevalent—long wait times! When a professional short sale processing company is not involved, the time periods can be extremely drawn out, oftentimes leading to buyers dropping out of the deal.
Even with a short sale processor working the file, the estimated turnaround times for responses are longer than average. For example, the typical wait time for an offer response from a short sale lender can be 5-7 business days, compared to 24-48 hours with a traditional seller.
If you found a short sale property you want to buy and want the process to be handled by a reliable short sale processor quickly and efficiently, fill out the contact form on this page to get connected with a reputable professional in your location.
The second con of purchasing a short sale is the high likelihood that you’ll have to purchase it AS-IS. For most cash investors, this is not an issue, as they are prepared to perform the work necessary to add value. However, the buyer must beware that most short sale sellers are in a distressed financial situation and unable to handle any maintenance/repair work on the property.
All in all, a short sale can be a very profitable purchase, whether you are acquiring a rental property or a house to flip. Just be aware of the situation, do your residential investment property due diligence, and be prepared to buy the home as-is.