When looking for a new home, there are a lot of different options. Should you buy a single-family unit? How about a Townhome or Condo? There are investment homes, and then there is something called a short sale. What is a short sale? Is a short sale something you should invest in? What are the ins and outs of a short sale?

There are a lot of questions when it comes to a short sale. What do you need to know about them, before you invest your time and money in one?

What is a short sale?

Regarding housing, a short sale is when someone sells their house for less than the mortgage loan amount they owe. Short sales often happen when a homeowner loses a job or income that allowed them to pay for the house each month. They may fall behind on their payments, and the value of their homes plunges. If the homeowner needs to move into a new place and doesn’t use any government assisted programs, then the house falls into the ownership of the bank.

What are the advantages of doing a short sale as a homeowner?

On the surface, a short sale may seem like it doesn’t have a lot of advantages for a homeowner. It may look like they are giving up, but in reality, it is cutting losses, before a situation gets too dire. One of the advantages of making a short sale for a homeowner is that it doesn’t damage their credit as much as a foreclosure does. By creating a short sale deal with the bank, you are showing them that you are trying to be more responsible for being proactive and helping them solve the situation. It also allows a homeowner to get out of a situation before they incur too much debt.

How does a short sale differ from a foreclosure?

The most significant difference between a short sale and a foreclosure is the way that it happens. A short sale occurs when a homeowner goes to their lender and requests a short sale. They know that they underwater on their mortgage and they can’t pay for the house. The bank then goes through the process of paperwork to determine if making a short sale is in their best interests. A short sale is often a lot longer process to sell because the bank wants to make sure they get the best possible return on their investment.

A foreclosure is when a lender stops paying their mortgage for 3-6 months. If the homeowner continues non-payment or makes any arrangements to pay, the bank seizes the home and forecloses on it. Foreclosures usually go a lot faster than a short sale so that they can recover as much of the home value as possible.

What are the advantages of a short sale to a buyer?

A savvy or lucky buyer can get a good deal on a short sale. It is all about timing, but when banks or homeowners are desperate to unload a property, a buyer can swoop in and get a good deal on a much better house. The competition for a short sale is often a lot less, because of the time involved to get a quick sale house. Most people want or need to get into a home within a limited time. Most buyers don’t have the time required to deal with all the red tape and paperwork. Another advantage that a short sale can provide is the occupancy of a short sale. Often homeowner’s that are having a short sale will live in the home, thus preventing looting and mistreatment of the house. Foreclosures have to be abandoned, leaving it open to looting and neglect.

There are a lot of questions surrounding a short sale. If you have more questions, reach out to a lender or real estate agent to get a more in-depth explanation.