Short Sales: How To Find Them, What You’ll Pay, and Red Flags To Look Out For

Let’s face it: The housing market is tough right now. Home prices are high, interest rates are up, and many people are finding it harder than ever to afford the house of their dreams. It's no wonder that many buyers are on the lookout for a good deal. One way to score a steal is through a short sale—but it's not as simple as it seems. There’s a lot to know before you jump in, including the latest scams that have people losing more money than if they had bought a house outright.

What is a short sale?

A short sale happens when a homeowner sells their property for less than what they owe on the mortgage. This typically happens when the homeowner is facing financial hardship, and their lender agrees to let them sell the house for less than the debt to avoid foreclosure. It’s easy to confuse short sales with foreclosures and auctions, which can occur under similar circumstances, but there’s a clear difference.

• Foreclosure: In a foreclosure, the bank takes over ownership of the property because the homeowner has defaulted on their mortgage. The bank will then sell the house at auction to recoup the loan.

• Auction: This is a public sale, usually held at a courthouse, where the bank or lender tries to sell the property to recover the debt. Bidding is open to the public, and the home is often sold as is. This also usually happens after you’ve defaulted on your mortgage, or failed to pay your property taxes.

While short sales tend to be more common during economic downturns—hitting a high in 2011 and accounting for more than 50% of home sales—they’ve become less frequent in recent years, as the market has rebounded. They still pop up occasionally, especially in areas where homeowners are struggling financially. 

How sellers benefit from short sales

If you can’t pay your mortgage, a short sale is a good way to protect your credit. It harms your credit less than a foreclosure, which stays on your record for up to seven years. You can stay in your home during the sale, providing stability. Short sales are also more private, avoiding public foreclosure signs. Plus, the bank pays the real estate agent’s commission, saving you from those fees.

How buyers benefit from short sales

For buyers, short sales offer the chance to buy below market value, which can be a great deal in a competitive market. Sellers are motivated to sell quickly, but the process is slow and complex since the lender must approve the sale. This means more paperwork and delays. Short sales are usually sold as-is, with limited inspection or repair options, so buyers should be ready to handle any hidden issues. If you’re patient and prepared, the savings can be worth it.

Short sale scams to be aware of

• Expensive upfront fees - Scammers posing as short sale experts may demand upfront fees and then disappear or do nothing. Legitimate real estate pros or attorneys never require upfront payments; fees are paid only at closing.

• Sounding too good to be true - Scammers may list properties at unrealistically low prices on sites like Craigslist or social media to lure buyers. After you show interest, they demand application fees, earnest money, or wire transfers, then disappear. Never wire money outside an official escrow account. If pressured to act fast or skip due diligence, walk away.

• Fake buyer offers - Some scammers pose as buyers to access your finances or trap your home in fake deals with delays and stalling. Never transfer a deed without legal and lender approval. Always work with a licensed agent or real estate attorney.

• Flopping - This one’s more complex—and criminal. In a flopping scam, a corrupt seller (or seller working with a complicit agent or investor) intentionally misrepresents the value of the home to the bank. 

How to protect yourself

• Always work with a licensed real estate agent.

• Insist on full transparency.

• Verify the credentials of everyone involved.

• Report suspicious activity to your local real estate board, the CFPB, or the FTC.

• Take your time. Fraudulent schemes often involve pressure tactics.

How to find a short sale

Finding short sales can be a bit trickier than finding regular listings, but it’s not impossible. The best way to get started is to work with a real estate agent—ideally one with short sale or distressed property certifications. Many agents have specific certifications that show they are qualified to handle these types of transactions, so do your homework and ask around.

Source: realtor.com

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