Key takeaways
- A short sale is when a mortgage lender agrees to let a homeowner sell their home for less than what they owe on the mortgage.
- Short sales often take place when a homeowner owes more than the property is worth.
- A short sale is different from foreclosure, which involves the repossession of a property.
Short sales were common from 2008 to 2012, but they are less common in today’s booming housing market. Still, these distressed sales — in which a lender lets the borrower settle their mortgage for less than the total amount of the debt — could become part of the homebuying landscape again. For a buyer, a short sale can yield a good deal on a property, but it generally takes a certain amount of fortitude and patience, plus a lot of luck.
In this article
What is a short sale?
A short sale is when a mortgage lender agrees to accept a mortgage payoff that’s less than the outstanding balance, usually to facilitate a sale of the property. The lender forgives the owner — typically someone in financial distress — the remaining loan balance.
A short sale occurs only with the lender’s permission. Generally, it happens when a home’s value has declined and the mortgage holder owes more than the home is worth, putting them in a state of negative equity.
Short sale vs. foreclosure
There is a difference between buying a home through a short sale versus a foreclosure. In a foreclosure, the lender repossesses the property and then tries to sell it for enough to recover its costs. In a short sale, the buyer is purchasing a home from the original owner, who will then repay their mortgage lender. The lender accepts that it won’t recover the full amount of its debt.
Who benefits from a short sale?
The reality is that short sales are a mixed bag for the buyer, the seller and the lender. Everyone gains something but gives up something too.
- Seller: Through a short sale, the seller can avoid foreclosure. However, they will also experience damage to their credit and walk away from the transaction with no cash for a new place.
- Buyer: The buyer gets the property at a reduced price, but the property, in all likelihood, has its share of problems — think fixer-upper or “as-is” property — and the deal needs to go through considerable red tape to make it happen.
- Lender: For the lender, the proceeds from the short sale transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. The lender takes a financial loss, but perhaps not as large a loss as it might if it foreclosed on the property.
The short sale process: The seller’s side
1. Submit a hardship letter to your lender
The first step of the short sale process is convincing the lender or mortgage holder that you have come up against a legitimate financial hardship that prevents you from continuing to make mortgage payments on the home. This could involve losing your job, a health-related issue, divorce or even the death of your partner. You must communicate your change in circumstances to your lender through what’s known as a hardship letter or hardship package. As part of the hardship submission, your lender might require you to provide significant documentation verifying your hardship, such as bank statements and copies of bills or other expenses.
2. Hire a real estate agent
Unless you plan to go it alone, you’ll need a real estate agent to list your home. It’s a good idea to find a Realtor who has previous experience with the complexities of short sales and can help you navigate the process successfully (some agents may have even completed coursework related to short sales). Interview a handful of agents before making a decision to find a professional who understands the process well.
3. List your property for sale
Once you’ve hired an agent, the next step is to list your home like you would with a traditional home sale. You’ll hold open houses and wait for offers to come in. Work with your Realtor to come up with a reasonable price.
4. Submit offer to lender
Once you receive an offer you’re willing to accept, you must submit it to the lender for review and approval. The lender review process can be lengthy, and the lender may not necessarily accept the initial offer from the prospective buyer. Finalizing a deal may take additional negotiation between the lender, the buyer and you as the seller. And remember, there is no guarantee that the lender will ultimately approve the offer.
5. Finalize the sale
If the lender does approve the offer, the sale can move forward, and the lender uses as much of the proceeds as possible to pay off your mortgage balance.
The short sale process: From the buyer’s side
1. Identify potential short sales
Locate pre-foreclosures in your area by checking online listings, searching courthouse listings or legal ads or using an experienced buyer’s agent. When looking, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it’s a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan.
2. Do your research
Start by viewing the property. Gauge its condition and estimate how much it will take to repair or renovate. If it needs work, many “normal” buyers won’t consider it, which is good for you. Then, figure out how much you could earn by investing in the property: What’s the property’s worth and profit potential? Finally, ask the seller or the agent what liens are on the property, and which lender is the primary lien holder. Confirm this information through a title search before closing the deal to ensure there are no undisclosed liens on the property.
3. Figure out the financing
You have to know how you’re going to pay for the property. It’s important to understand that in a short sale, you need the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days, so get your financing in order.
4. Work with the lender
You or your agent should speak with the lender’s loss mitigation department or resource recovery department. You will need to have the homeowner complete and sign an authorization letter (notarization is usually required), which gives the lender permission to discuss the mortgage situation with you. Additionally, many lenders have an application specifically for a short sale request. If they don’t have a short sale application, find out what paperwork they need to consider a short sale.
5. Assemble a proposal and negotiate terms
Next, you’ll assemble the proposal, which generally consists of a package of materials including the application and authorization letter, purchase and sale agreement, hardship letter, statement of the property’s value, a detailed description of the costs and liabilities and the settlement statement. Once you submit the proposal, the lender may reject your offer or return with a counteroffer. Figure out beforehand what your absolute highest limit is, and don’t be afraid to walk away if the lender won’t meet your figure. Once you’ve reached an agreement with all parties, get everything in writing and officially recorded. Next comes the closing, and the property is yours.
What to consider when buying a short sale home
With a short sale, you won’t be able to simply purchase a home for a good price. Here’s an overview of considerations for buying a short sale home:
- The lender must agree. For a regular home sale, the seller would use the proceeds to pay off the original loan. In a short sale, the home sells for less than the seller owes, so the lender won’t get all their money back. As a result, the original lender must agree to the sale.
- The seller must prove they have no other option. The seller needs to show some sort of hardship. If they can prove that they can’t keep making mortgage payments and will eventually default, the lender is more likely to agree, especially if the lender doesn’t want to go through the foreclosure process and then sell the home on its own.
- A home’s price must be in line with market value. In many cases, short sales go through because the local market is faltering, and the home’s value has dropped accordingly. The price the buyer is paying must usually be at the current market value.
- Short sales need to be disclosed. When a home is listed for less than what’s owed on the mortgage, that must be disclosed upfront. Potential buyers should be aware the price is less than the mortgage balance, so they’ll be responsible for negotiating with a lender, as well as dealing with the seller.
- Skipping formalities can cause big problems. Foregoing a home inspection or failing to read legal disclosures could cause unwanted issues. A home inspection helps you identify issues you might otherwise miss, such as necessary repairs or maintenance. If you find a major issue, you might want to back out of the deal. In addition, a typical disclosure statement would indicate whether a house is in a flood plain, had any unpermitted renovations or contains notices of any dangerous substances (to the best of the seller’s knowledge).
Common reasons that short sales fall through
Short sales are complex, which means they fall through on a fairly regular basis. There are many reasons why a short sale may not move forward.
Unable to establish hardship
Your hardship letter should explain why you’re truly unable to continue making mortgage payments rather than an explanation of why you’re tired of dealing with financial difficulties. A borrower who could afford their mortgage payment if they cut down spending in other areas, for example, won’t have a compelling letter. A borrower who’s lost their job and is dealing with major illness and medical expenses that have eaten their savings will have a better chance.
You have too much money
If the seller has money or financial assets, including retirement funds, it is unlikely that the lender will let the debt slide. The proof of income and assets (or lack thereof) must include income tax and bank statements going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application. If that’s the case, the deal is unlikely to close.
Home value has not dropped
Part of a seller’s financial distress can arise from the home being underwater — meaning it’s worth less than the amount owed on it. This situation often occurs if the local real estate market has crashed, drastically lowering property values, and seems unlikely to rebound soon. However, a comparative market analysis (CMA), which takes into account the value of similar properties to estimate the value of the home you’re trying to sell, may show that your home’s value has not dropped enough to justify a short sale.
Too many liens
There might be multiple liens on your property and the proceeds from a short sale may not be enough to resolve all of the outstanding debts.
FAQ about short sales
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Short sales can provide a good opportunity for buyers to purchase a home at a bargain price. However, the approval process with the (seller’s) lender can sometimes be lengthy, which can be challenging for buyers who are seeking a quick sales process. Additionally, a home that is being sold via short sale may have issues and may need repairs.
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While it is possible to negotiate the purchase price for a home that is being sold via short sale, there is no guarantee that the mortgage lender will approve the price. And because the final price requires the lender’s approval, it can be more time-consuming to negotiate the price. It’s also unlikely that the seller will be able to make concessions or assume additional closing costs.
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A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming. Plus, the original lender needs to review the short sale offer to determine whether it will accept it. If the lender believes it can make more money by going through the foreclosure process, it might not accept the short sale proposal.
You can reduce the time it takes by working with a real estate agent who has experience with short sale transactions and a good track record. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Having a real estate agent on your side who knows how short sales work — and who has negotiated others — will increase the chances of closing the deal.
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Whether you should proceed with a short sale depends on your situation and what’s likely to work best for you in the long run. If you can’t afford your mortgage, and if home values have dropped in your area, you might not have much of a choice. A short sale might be able to help you preserve your credit to some degree by helping you avoid a foreclosure on your record.
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One alternative to a short sale, of course, is simply allowing the mortgage lender to foreclose on your home. A foreclosure on your record, though, can make it hard to get a mortgage in the future, so it should be a last resort, not your first option.
Forbearance is a short-term solution in which the lender agrees to suspend or reduce your monthly mortgage payments for up to one year. Keep in mind that interest will continue to accrue during this period.
You also can try refinancing your mortgage, though that might be difficult if your finances are shaky. Another potentially better option is a loan modification, which adjusts your loan terms so that the monthly payments become more affordable. Unlike a refi, a loan modification often doesn’t require a home appraisal, making it easier to get when you’re underwater on your home.
Real estate apps have been around for over 10 years now — and it seems like new ones come out as regularly as homes come to market. As their numbers grow, so does their variety: In addition to applications for buying, selling, and renting real estate, there are now platforms for obtaining mortgages, investing in real estate, and even designing a house.
Here are the nine of the best real estate applications on the market today.
What are real estate apps?
Real estate apps (short for applications) are a one-stop shop for prospective tenants, home buyers, home sellers, home owners and investors — not to mention the folks who like to just browse. They consist of databases with thousands — sometimes even millions — of properties, like a vast, location-spanning multiple listings service (MLS).
Most of these mobile apps make their money by charging a listing fee, selling ad space to Realtors or contractors, or taking a cut of the sale price or rent. Some are backed by real estate companies or brokerages, like Zillow and Redfin. Others are independent.
Types of real estate apps
The majority of real estate applications are focused on the house-hunting and renting experience. They’re a place for buyers to browse homes for sale or rent and a place for sellers and landlords to do market research, and list their properties for sale or rent.
There are real estate apps that focus on commercial properties to buy, sell or lease. Some provide directories of real estate agents and brokerages; others are oriented towards lenders and financial services. Rising in popularity of late have been apps geared real estate investments and home design.
Zillow
Best for initial research for home buying, renting, or selling
One of the most well-known and highly rated real estate search apps, the free Zillow app gives users access to a wide range of properties with detailed filter criteria. Through the app, you can coordinate your search for a home with someone else, meaning you or your roommate or partner can share your favorite finds easily.
The Zillow app does have a few flaws, however. Zillow’s “Zestimate,” its home evaluation tool, doesn’t always give an accurate picture of a home’s value, especially when details are missing from a listing. Real estate agents can also pay to have themselves featured as a contact for a property, even if they aren’t the actual listing agent, which can confuse things for homebuyers.
Pros:
- Most widely used application
- Can find homes for sale or for rent
- Can view sale price history for the whole neighborhood
Cons:
- Sometimes flawe price estimates and rental estimates
- Your information may be sold to lenders and Realtors
- Asking questions can lead to wave of unsolicited emails
Redfin
Best for saving on commissions
If you’re seriously home-hunting, the Redfin app can be a useful tool. Redfin is a real estate brokerage, so in addition to searching for properties through the app, you can go ahead and buy one with a Redfin agent and receive a portion of the agent’s commission back. If you sell your home and buy another one with a Redfin agent, you’ll only pay a 1% listing fee for your home, saving you from the standard 3% on both transactions.
The Redfin app also offers home value estimates, which might be more accurate than Zestimates, but still aren’t a substitute for an appraisal. Overall, the app is highly rated by users, and it’s free, making it a solid option for house hunters.
Pros:
- Save thousands in commission when buying or selling
- Accurate home value estimates
Cons:
- Limited neighborhood info
- Rental side is new with limited listings
Trulia
Best for getting a feel for a neighborhood
Trulia is actually owned by Zillow and uses information that comes from Zillow, but augments it a bit. Trulia includes features like drone film footage, quotes from people who live in the area, school ratings and walkability scores. Trulia’s home value estimates may be more accurate than Zillow’s because it uses more data points.
Pros:
- Extensive neighborhood data available in the app
- More accurate home estimates
- Easy to identify and contact the listing agent
Cons:
- Not great for home sellers: no agent directory, neighborhood price history isn’t as thorough
- Application can be difficult to navigate
Apartments.com
Best for renters
Are you looking for a rental? The Apartments.com app can help you easily unearth your next place. The app offers a streamlined search experience for apartments, condos, homes and townhomes, and you can sort through rentals based on unique filters such as wheelchair access, in-unit laundry, pet-friendliness or the addition of a dishwasher.
Although it’s free to browse rentals through the app, you’ll run into a fee if you want to apply for one directly through the platform. The in-app rental application costs $29.00 plus tax for up to 10 applications made within a 30-day period.
Pros:
- Apply to many apartments for the same fee
- View many types of rentals in one spot
Cons:
- Limited adoption outside of metropolitan areas
- No reviews from current or former tenants
Realtor.com
Best for landlords and for most accurate data
Homebuyers and renters alike can gain access to the most (and most up-to-date) listings by using the free Realtor.com app. With an extremely wide selection of properties available, you’re able to see all of the options out there. Realtor.com is also affiliated with the National Association of Realtors (NAR) and has access to a large portion of multiple listing services, so its listings are usually refreshed quicker compared to other sites.
Realtor is the only application on our list that lets landlords list rentals and take applications for free. So it might benefit you if you’re thinking about leasing that garage apartment or guest house or a second home.
In addition, listings on the Realtor.com app include handy information and filters, like the noise level of a neighborhood or commute time, which can be helpful when looking for a place to call home.
Pros:
- Updates the quickest: best spot to find brand new listings and see when something is sold
- Commute and noise level data in app
- Free rental listing and applications
Cons:
- Can’t filter results as thoroughly as other apps
- No easy way to see neighborhood home values
LoopNet
Best for commercial real estate
Residential real estate isn’t the only game in town. If you’re looking for a commercial property, the LoopNet app can help you find the perfect fit, and more information than what would be available on other apps geared toward residential homebuyers. You can easily search based on the type of commercial property you’re looking for, including office, retail, restaurant or multifamily dwelling.
One drawback that seems to be an issue among users, however, is the inability to save your search within the app. That means you’ll be forced to re-enter your search filters every time you want to explore listings.
Pros:
- Easy to find commercial properties for rent and for sale
- Thorough details in property listings
Cons:
- Only lists properties, not businesses that are for sale
- Limited tools like rent forecasts and loan calculators
Landa
Best for beginning real estate investors
The Landa app allows users to invest in real estate with as little as $5. Users can view rentals available to invest in and buy shares in properties. The application has an interface that allows you to see your real estate portfolio all in one place and updates you when you receive your share of the rental income.
Pros:
- Easy to find investment properties
- Low financial cost to get started
Cons:
- Limited real estate investment education within the application
- Newer company, limited track record
Rocket Mortgage
Best for financing
Rocket Mortgage is one of the top home loan lenders in the country. They have developed an industry-leading application that allows you to do most of the process on your phone. You can get pre-approval for a mortgage, submit documentation for underwriting, and e-sign your documents all in the secured application.
Pros:
- Streamlines the lending process: You can prequalify, submit documents and sign them all in the application
- Can submit mortgage payments on the app
- Includes affordability and payment calculators
Cons:
- Limited in-app financial education
Houzz
Best for people designing and building homes
Houzz is ideal for anyone designing their own home. The app allows you to decide layouts, color palettes and more. It can connect you with contractors, designers and builders all in one place. It even has a shopping cart where you can pick out furnishings and lighting fixtures, and have them shipped directly to your build site.
Pros:
- Connects you with local construction professionals
- Presents digital mock-ups of how things will look in your home
- Offers high-quality furnishings
Cons:
- High prices for most goods and services
- Potentially limited list of contractors
FAQs
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One prized feature of home buying-oriented apps is the property evaluations they set on listings. They determine home value through proprietary algorithms. These algorithms incorporate data that includes things like recent home sales in the area, age of the home, square footage of the home, number of rooms and any previous sale price of the home — all factors that professional human appraisers often use, too.
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Real estate applications have varying accuracies. The tools used by Trulia, Realtor and Redfin are generally viewed as the most accurate. Zillow’s estimate has become a bit of a joke in the industry.
Also, the apps don’t have a way to know everything that can significantly affect your home’s value — like its curb appeal or its condition. For example, they can’t know if you recently updated the kitchen, or that the carpeted floors are redolent of years of smoking and cats. All of these things can make the sum your home commands on the market quite different by than the estimate their computer came up with.