How To Buy A Short Sale

Knowing how to buy a short sale in today’s market will become more important as they increase in supply on the market. There are not a lot of Short Sales right now because home values have risen so much that most people are not under water. However, the market is starting to decline and there is a rise of short sales. It is important to get a Realtor that is knowledgeable and can help you navigate buying a short sale property.

1. Does it make Sense to Buy a Short Sale?

In this series we’ll look at several aspects about Buying Short Sales to get you up to speed. You’ll get a better idea if buying a Short Sale is even something you want to bother with. Not all Short Sales are built the same and each one should be evaluated before deciding to pursue it.

You’ll be able to make the best decision if you know the basics and have a Buyer Agent REALTOR® that has experience buying Short Sales or Foreclosures such as Bank Owned or Government Owned in addition to Normal properties. You will have access to the greatest inventory of homes on the market if you don’t eliminate any of these other types of homes from your search.

2. What is a Short Sale?

A Short Sale gets its name primarily in terms of loss of money to the bank, and not in terms of time. If we were looking at it in terms of time then a Long Sale would be a more appropriate name. Short Sale means selling short of the full amount of what is owed on the loan or loans in default held by the bank or banks. So the bank is taking a loss or getting shorted on the money they borrowed to the home owner in default.

A home owner in default can take on the loss if they do not get a deficiency waiver with the short sale approval from the bank. A seller can also take a loss by having to pay taxes on the deficiency amount. A deficiency is the difference between what the home sold for and what was owed on the home. The Mortgage Forgiveness Debt Relief Act (MFDRA) that was in effect through the end of 2013 restricted the IRS from collecting taxes on the deficiency amount. There is a bill in the Senate to extend the MFDRA through the end of 2014 which would be retroactive through all of 2014 if passed but it is held up in the Senate.

3. Are you sure you want to Buy a Short Sale?

Typically people are interested in buying a Short Sale because they believe they can get a better deal than buying a “normal” home on the market. Getting a better deal on a Short Sale is not necessarily always the case. Getting a good deal on a Short Sale depends on many variables that we explain in another section below or in this series called “What Should I Consider When Buying a Short Sale”. If you are an investor buyer you likely need a greater margin of savings to make it feasible. If you are a buyer that will be an owner occupant than you are likely more concerned about liking the house in the first place but getting a good deal would be an added bonus.

If your REALTOR® knows what they are doing then you can get at least a 5% savings in comparison to buying a normal home. There is potential for a much greater percentage savings depending on the many variables involved. All Short Sales are Not built equally, some are not worth pursuing. They need to be looked at on a case by case basis. So if you are looking at a deal that is only a potential 5% savings, you have to ask yourself is it really worth it given all the other variables. Remember time is money too.

4. How do I get the Best deal on a Short Sale?

The very short answer to this question is to pick the right type of Short Sale and work on getting the FMV (Fair Market Value) as low as possible. The FMV is determined by an Appraisal or BPO (Broker Price Opinion).

Picking the right type of Short Sale is discussed in another section below or in this series called “What Should I Consider When Buying a Short Sale”.

Working on getting the FMV as low as possible requires disputing an Appraisal or BPO that may be higher than you like. This requires more time and effort should you dispute to get the FMV lower. The banks, lenders, or investors base their net requirement percentage from the FMV, so the Appraisal or a BPO is very important to your bottom line as well. A variance can be submitted to request approval on an offer below the Net Requirements but there are special circumstances when that is feasible.

5. How do I make a Good offer on a Short Sale?

This is a loaded question and the answer to this question is really based on what your goals are. Likely why you are even considering it is that you want to get a Good deal. In the context of this discussion a good offer on a Short Sale is one in which you make the lowest possible offer with the best chance of being competitive and getting the Short Sale approved. In order to do this you have to know what teh Net requirements are.

6. Net Requirements

First a buyer or more specifically their REALTOR® needs to look at what type of Short Sale loan it is as there are varying Net Requirements that banks may need to meet. The below percentages are based on FMV determinations. A buyer can offer and sometimes get an offer accepted below the Net Requirements but there are special circumstances to consider that won’t be discussed here.

1. VA Net Requirements = 85.05%

2. FHA Net Requirements

88% 0-30 Days on Market (DOM)

86% 31-60 days DOM

84% 60 DOM or more

3. Conventional Net Requirements = None specified, lender or investor dependent

7. Two Step Formula

These Net Requirements for FHA and VA Short Sales are a percentage of the Fair Market Value (FMV) prices as determined by a Broker Price Opinion (BPO) or Appraisal. So to see whether it is a good deal to buy a Short Sale as opposed to just buying a home not in Short Sale, you need to look at 2 items in relation to each other:

1. What are the typical expenses for the seller (bank) in a particular Short Sale?

2. How much lower than FMV can I offer on this Short Sale?

Determine your Maximum Offer by adding expenses to the Net Requirements

Your Max Offer should be lower than FMV (obviously if you want a Good Deal)

8. Short Sale Closing Costs

Typically a buyer does not want to bring any money to closing outside of what they are absolutely required to, which is usually down payment money if that is required. So a good REALTOR® will consult with the buyer’s lender to get the projected amount of buyer closing costs that will be needed and in turn ask the seller to pay for that as seller concessions. This is about $4,500 on a $200,000 loan. Much could be discussed on buyer closing costs but this depends on the lender. Some lenders charge a 1% origination fee with a lower rate and some lenders charge a .5% or less origination fee but higher rate. So for our example we will use $4,500 in closing costs.

For FHA loans there is a limit of up to 1% to be paid in closing costs by the seller if the buyer is obtaining an FHA loan. If the buyer is obtaining a VA or Conventional loan to buy the property in an FHA Short Sale then a variance can be submitted to ask for the 1% in closing costs to be paid by the seller. It is acceptable if need be for the seller to gift their FHA PFS (Preforeclosure Sale Program) incentive to offset the closing costs that may be needed to close a deal.

So it is very probable that the seller will pay closing costs on a Short Sale as long as Net Requirements are met. So for our example here we’ll presume the buyer needs $4,500 in closing costs to be paid by the seller.

9. Typical seller expenses

Typical seller expenses on a $200,000 home could be as follows:

1. Seller Concessions = ~$4500
2. Real Estate Agent Fees = ~6% of purchase price ($12,000 on a $200,000 home)
3. Owners Title Policy = ~$600 (dependent on certain factors)
4. Property Taxes = ~$1000 (depends on time of year)
5. Closing Services Fee = ~$125

There are other expenses that you could ask the seller to pay but remember they are looking at a net requirement and every thing you ask them to pay will add on to the price of an offer they are likely to accept.

So add this all up and we have $18,225 in roughly estimated expenses. Presume for example we have a home that has a close to accurate FMV or $200,000 and we are dealing with a VA Short Sale. The Net Requirement would be $170,100 (85.05% of $200,000) and we would have $18,225 of expenses we could estimate that we would add on to that.

A good offer with a good chance of getting approved the first time would be $188,325. So we are saving about $12,000 and getting a good deal. This is a 6% savings over a comparable home that is not a short sale.

10. Can a Buyer Back out of a Short Sale?

Absolutely, In Colorado the buyer can back out of the Short Sale purchase contract on or before 3 days after Short Sale approval per the Short Sale Addendum. The Short Sale Addendum must accompany a Contract to Buy and Sell Agreement on a Short Sale offer (standard approved Colorado Real Estate Commission Purchase Contract). So the buyer is protected in that they can back out any time during the Short Sale process before this deadline and get their earnest money back. The buyer basically has 3 days after Short Sale approval to determine whether they want to accept the terms of the Short Sale approval.

11. How long does it take to Buy a Short Sale?

For a Pre-approved Short Sale it can take as little as 30 days once under contract but more likely 2 to 3 months and that all depends on many variables as detailed in one of the sections below. For Short Sales that are not Pre-approved its best to prepare your mind that it will take 4 to 6 months. There are cases our there where short sales take a year or more but it would be wise to set at most a 6 month deadline for a short sale approval or back out of the deal. Evaluating whether to jump in to buying a Short Sale is very important to prevent you from wasting your time. Having an experienced Buyer’s Agent REALTOR® that has bought many Short Sales is important.

12. What Should I Consider when Buying a Short Sale?

It is important to have a great Buyer’s Agent REALTOR® that can help you look at the following variables and determine whether pursuing a particular house on a Short Sale is reasonable. As I’ve said before, Not all Short Sales are built equally, some are not worth pursuing. They need to be looked at on a case by case basis.

Variables to Consider when Buying a Short Sale:

1. What Type of Loan is in default on the home?

  • Is this an FHA, VA, Conventional, or other loan?
  • The type of loan determines the net requirements needed on various types of loans which ultimately affect how good a deal you are going to get.
  • The type of loan may impact closing costs that are offered which can depend on the type of loan the buyer is obtaining.

2. What is the Appraisal or Broker Price Opinion (BPO) on the property?

  • Is the Appraisal or BPO too high which affects Fair Market Value (FMV) and the net requirements calculated which affect how good a deal the buyer gets.
  • An Appraisal or BPO can be appealed by the buyer agent but that will add more time to the process.

3. Is it a Pre-approved Short Sale or how far along is the Short Sale in the process?

  • A pre-approved Short Sale is one in which the bank at some point communicated back to the listing agent at what price they would approve the short sale.
  • There can be a few reasons why a short sale would be pre-approved such as a previous buyer that got to the point of a short sale approval and then backed out.

4. What is the Experience of the Listing Agent processing the short sale?

  • Has the Listing Agent had any special training on processing short sales and do they have a communicated track record for closing short sales.

5. What Bank are we dealing with?

  • Some of the larger banks like Citi, Wells Fargo, Chase, and Bank of America have put tremendous efforts in optimizing their Short Sale departments over the last 7 years that their processes are streamlined and run efficiently which shorten the time to close on a short sale. There are many lesser known banks too that do very well processing short sales yet others have a notorious record for being horrible at processing short sales.

6. What are the Current Market Conditions?

  • Is there a low inventory or homes, which could be either Normal or Short Sale properties
  • How many Days on the Market has a particular Short Sale been active


*1. Veterans Benefits Administration, Circular 26-13-15, September 3, 2013
*2. US Department of Housing and Urban Development Ref: Mortgagee Letters 2003-19,
2008-43, 2010-08, 2013-19, 2013-23, and 2013-34, Pre-foreclosure Sales Program, Revised – November 29, 2013