Buying a Short Sale Home: A Guide to the Process, Risks, and Redfin’s Policy

Purchasing a short sale home can be a path to a potential deal, but the process is notoriously complex and time-consuming with a low probability of success. This guide explains what a short sale is, outlines the significant risks for buyers, and details the specific criteria real estate brokerages like Redfin use to determine which short-sale transactions they will support. The key takeaway is that not all short sales are viable, and understanding the bank's requirements is crucial before investing months in the process.

What is a Short Sale in Real Estate?

A short sale occurs when a homeowner sells their property for less than the outstanding balance on their mortgage. For the sale to proceed, the lender (the bank) must agree to accept the proceeds and forgive the remaining debt. For example, if a seller owes $400,000 but the home's market value is only $375,000, the bank must approve the $25,000 loss. This process is distinct from a foreclosure, where the bank repossesses the home, or an REO (Real Estate Owned) property, which the bank sells after a failed foreclosure auction. The short sale process is entirely contingent on the bank's approval, which introduces significant complexity and delay.

What Are the Primary Risks for a Short Sale Buyer?

Buyers are often attracted to short sales by the prospect of a below-market price, but they face considerable risks.

• Extended Timelines: The bank's approval process can take several months. With financial institutions often backlogged, delays of three to four months are common. During this time, the seller may cease maintaining the property.
• "As-Is" Condition: Banks almost always require the buyer to purchase the property in its current "as-is" condition, refusing to pay for repairs uncovered during an inspection. Since buyers typically won't pay for an inspection until the bank approves the deal, significant issues may be discovered late.
• Low Approval Rates: Banks reject many short-sale offers if the price is too low or the seller's situation is too complex. Multiple mortgages or liens on the property drastically reduce the chance of success.
• Competing Offers: Other buyers can submit offers on the same property while the bank is considering yours, potentially creating a bidding situation after a long wait.

How Does Redfin Approach Short Sales for Buyers?

Due to the high failure rate and resource-intensive nature of these transactions, Redfin has established a policy to focus its efforts on short-sale listings that have a realistic chance of closing. Based on experience, they will typically only support a buyer's offer if the following criteria are met:

1. Only One Mortgage Lender: The seller should have only one mortgage on the property. When a second mortgage exists, that lender is less likely to approve the sale because they stand to lose more money.
2. Preliminary Paperwork is Complete: The seller must have already provided the bank's loss mitigation department with a hardship letter, financial statements, a preliminary net sheet, and a Comparative Market Analysis (CMA) or appraisal to validate the sale price.
3. No Additional Liens: The property must be free of other liens (e.g., from contractors or the IRS), as these creditors must also be paid from the sale proceeds, which the primary bank will rarely allow.
4. An Experienced Listing Agent: The seller's agent must have proven experience or training in closing short sales. A skilled listing agent is critical for navigating negotiations with the bank's loss mitigation department.

What Practical Advice Should a Buyer Follow?

For buyers considering a short sale, a cautious and informed approach is essential. Thoroughly vet the listing by asking the seller's agent about the status of the bank's paperwork and the number of liens. Prepare for a long waiting period and have backup housing options. Secure financing pre-approval to demonstrate seriousness to the bank. Finally, manage your expectations; a seemingly great price may come with hidden costs in time, effort, and potential repairs.

While a successful short sale can result in a good value, the path is fraught with challenges. Understanding the bank's role, the common pitfalls, and a brokerage's participation criteria can help you decide if pursuing a short sale is a worthwhile investment of your time.