Jacqueline Kyo Thomas
If you're looking to grow your business as a real estate agent, should you consider expanding into the world of short sales?
That's the question we're going to tackle in this article.
Short sales may seem scary because they’re far from what most real estate agents do on a day-to-day basis. Even your broker may not have any actual, real life experience working on a short sale.
But should that prevent you from trying your hand at it?
Not necessarily! There are clients to help and money to be made in a short sale. You are a licensed salesperson and are more than capable of handling this real estate transaction. But, because it’s a little more complicated than your traditional sale or purchase, you’ll definitely need more guidance in how to go about it.
Use this beginner-friendly guide as your starting point. Below, we’ll share the basics of short sales, how they work, and how you can get started with this type of service.
What is a Short Sale?
A short sale is a real estate transaction that occurs when a homeowner attempts to sell a home for less than the amount that they owe on their mortgage. Short sales happen when the homeowner owes more on their home than their home is actually worth.
This can happen for a variety of reasons. The most common cause of a short sale is when the homeowner has fallen into some manner of financial distress and is unable to meet their bills. Perhaps they’re unemployed or dealing with medical debt due to an unexpected illness. Other potential reasons to initiate a short sale include loss of income, death of a spouse, relocation, or military service.
This is also why short sale homes are often referred to as distressed properties. They’re “distressed” in terms of the homeowner’s ability to meet their obligation to repay their debt. Short sales are initiated to prevent foreclosure.
For this reason, short sale homes are also known as pre-foreclosure. There’s a distinct difference between short sale homes and foreclosure, which we’ll discuss later.
Because short sales tend to be priced lower than other listings, they’re particularly attractive to real estate investors hoping to flip and to first time home buyers who want to get a bargain on a great property. But while the low price point is great, a short sale home may be riddled with problems, so buyers must be aware. And, as a real estate agent, it’s important that you educate your clients on potential problems. While short sale homes are usually in better shape than foreclosure homes, short sales are also usually sold as-is. This keeps the price low but the risk high.
And the risk isn’t just related to structural problems with the home itself. Sometimes, a homeowner may change their minds and decide to pay back what may be due on the property. The homeowner may be within their rights to do so during any part of their selling process, and if they do, a buyer would be out of the money they may have spent to take care of inspections or other tasks. Not to mention the ensuing frustration and heartbreak.
Because of the above risks, many buyers instinctively avoid even looking at short sale properties. This can be a challenge if you’re representing a seller and hoping to attract a potential buyer.
How Does a Short Sale Work?
When a homeowner believes they will be unable to pay back what they owe on a mortgage, they’ll reach out to their lender or mortgage holder. They’ll usually be required to file a formal letter with the lender that explains why they can no longer repay the mortgage, and they will likely need to provide documentation to back up their claim, whether it’s a pay stub, tax return, death certificate, divorce decree, outstanding medical bills, or proof of unemployment. Each lender will have their own set of requirements.
This process may happen before or after a buyer has secured an offer for the home.
The lender is under no obligation to accept the homeowner’s short sale request. Even if the homeowner has experienced a justifiable financial hardship, it’s still up to the bank to accept a short sale or to move forward with foreclosure.
On the surface, a short sale may seem like a win-win scenario for both the homeowner and the lender. However, a short sale is complicated and can take a long time to close. While closing on a traditional home sale may take only 45 days, a short sale can take 6 months or longer.
If a lender approves of a short sale, it’s typically not a full approval. You can only secure the full approval from a lender when there’s an agreeable offer on the table to purchase the home. Until that point, both the seller and the lender can either accept, reject, or counter an offer. But, when it comes to the bank, this can also take a longer time than you may be accustomed to. The lender may take several weeks to ponder each offer that comes across the table. But if they do accept, the lender will issue an approval letter to detail the terms of the deal.
Upon selling the property, the lender has the option to forgive the remaining, outstanding debt from the borrower or they may be able to get a judgment against the borrower to pay what’s owed. This means that the homeowner may still be on the hook for thousands of dollars.
What's the Difference Between a Short Sale and a Foreclosure?
It’s easy to confuse short sales and foreclosures. In both events, the homeowner cannot pay. The key difference between the two is that, in a short sale, the buyer initiates the sale, and in a foreclosure, the lender initiates the sale.
Homeowners are often allowed to stay in the home during the short sale process. Whereas, when a bank forecloses on a home, the homeowner is evicted along with their belongings (if they haven’t already abandoned the home).
For this reason, short sales afford homeowners more dignity and give them a chance to move out slowly and on their own terms.
For homeowners who are unable to pay and drowning under mortgage debt, a short sale is an attractive option. When compared to a foreclosure, homeowners who initiate a short sale may be in a better position to recover their credit right away. Foreclosures can wreck your credit worthiness, and will stay on your credit report for seven years. However, a short sale doesn’t hinder the owner’s ability to apply for a new mortgage, and they can do so immediately.
That’s not to say that short sales don’t have any negative impact on the homeowner’s credit. According to Credit.com, a short sale can claim as much as 160 points.
How Do You Get Short Sale Listings? So how do you get started with short sale transactions?
The first step is to sit down with your broker. While not common, your brokerage may have its own set of rules and guidelines regarding short sales. You don’t want to enter into an agreement with a short sale client and accidentally run afoul of your salesperson license agreement.
If your broker gives you the go ahead, you can then market yourself as a short sale specialist. This can become your real estate niche. You can use these resources to help you reach your target audience of distressed homeowners:
- How to Become Better at Real Estate Prospecting
- How to Use Facebook to Get More Real Estate Leads
- Google My Business for Real Estate Agents
How Do You Work With Short Sale Clients?
Once you’ve found a seller who’s interested in working with you, here’s what you need to do to ensure that your arrangement is successful:
Price Competitively
Because short sales are risky, you must price at or slightly below market value in order to generate interest. Buyers (and buyer agents) know that the property will be sold as-is, so it’s key that the property is priced competitively.
Also, the lower you go, the more eyeballs you can get on the listing.
However, keep in mind that the bank (and the seller) both have the right to reject any offer that comes across the table. Plus, even if the bank accepts a low offer, they may come after the seller for the remaining amount. So, it’s important that you educate your short sale client about potential outcomes.
Market the Property
The bank won’t lift a finger to market a short sale property. That’s up to you and the seller. Be candid with the seller on what you’ll need from them. Since the owner is most likely selling due to a financial hardship, they probably won’t be able to invest much into the home, but there are some low-cost options you can pursue, such as clean and declutter or even stage the home with their own furniture.
Submit Offer to the Lender
If you get an interested buyer, the homeowner can then submit a short sale package to the lender that includes the buyer’s offer and other information about the buyer, such as their preapproval letter and purchase contract. The lender may also require an earnest money deposit.
How Will You Get Paid?
This is the tricky part of handling short sales. In a traditional sale, the listing agent commission is paid for by the seller. But in a short sale, the lender handles commission and can pay up to 6% of the sale price. This fee can vary because it’s up to what the lender deems as “reasonable and customary.” The lender may lower this fee if a single agent represents both the buyer and seller.
Final Thoughts
Because short sales can be complicated, time consuming, and oftentimes emotional, many real estate agents shy away from these types of transactions. However, if you’re patient and ready for a challenge, you can find a lot of success (and revenue) by specializing in this niche.