A short sale can be both good and bad for a buyer, offering below-market prices and less competition, but with risks like long, complex closing processes and buying the home "as-is". It is a good option for patient buyers looking for a deal, but a bad option for those needing to move quickly.
As a buyer, a short sale shouldn't affect your credit directly. However, if there are liens or other problems with the property that aren't resolved, it may have a long-term effect on your finances.
Although less severe than foreclosure, a short sale can still negatively impact the seller's credit score, making it harder to be approved for new loans. Lender approval requirement. The bank must approve the short sale, which can take several months and may delay closing. Potential for a deficiency judgment.
There's little room for negotiation with the seller, and it's unlikely the bank will lower the price at that point. It's important to be discerning when naming your price because the bank will have its own market value resources and won't be inclined to approve an offer that's more than 10% below fair market value.
After Short Sale Approval
Buyers may back out based on due diligence, appraisal, or financing at this point, just like any other contract. If it's within the guidelines of the contract, they're free to do so. If it's not, you'll get to keep their earnest money deposit as damages.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
The 70/30 rule in negotiation is a guideline to listen 70% of the time and talk only 30%, focusing on asking open-ended questions to understand the other party's needs, motivations, and obstacles, thereby building trust, empathy, and finding collaborative solutions, rather than dominating the conversation with your own agenda. A related concept, the 30/70 rule, shifts focus: 70% on preparation (IQ) and 30% on discussion (EQ) early in a relationship, then potentially shifting to more EQ (emotional intelligence/rapport) as the relationship evolves.
And there are practical reasons for being wary of shorting. Short selling exposes investors to theoretically unlimited losses if the stock price rises, leading to dramatic “short squeezes” where forced buying by short sellers drives prices even higher.
In a short sale, the lender typically pays most of the seller's closing costs, including agent commissions, title fees, and taxes, because they are accepting a loss to avoid foreclosure. The buyer is responsible for their own closing costs, but negotiations are key, as the lender must approve all expenses, and sometimes the buyer may negotiate for the lender to cover some costs to get the deal done.
The 7% sell rule is a stock trading guideline to cut losses quickly, advising you to sell a stock if it drops 7-8% below your purchase price to protect capital, remove emotion, and prevent small losses from becoming catastrophic, a strategy popularized by William O'Neil's CAN SLIM method for growth investing. It assumes that truly strong stocks typically don't fall much below their buy point, so a dip signals something is wrong, requiring you to exit the trade to preserve funds for better opportunities.
Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses. A short sale can also be the best option for a homeowners who are “upside down” on mortgages because a short sale may not hurt their credit history as much as a foreclosure.
In a short sale, the offer is negotiated with the seller, just as in a traditional sale.
These golden rules: Never Sell; Build Trust; Come from a Position of Strength; and Know When to Walk Away should allow you as a seller to avoid negotiating as much as possible and win.
A short sale can leave a negative mark on a seller's credit, but it usually lasts only a couple of years. In some short sale cases, banks will actually report the debt as “paid in full,” so a seller's credit takes even less of a hit. In contrast, a foreclosure can negatively affect a person's credit for up to 10 years.
Typically in a short sale, you must make an offer that is at least at fair market value. If the real estate market has declined, the fair market value may be much less than what the seller initially paid, but the bank has no incentive to go under that amount.
The homeowner loses his or her house, and the lender loses anywhere from 20 to 60 cents on the dollar [source: FDIC]. This is important to remember if you fall behind on your loan. The single most important step you can take to avoid foreclosure is to communicate with your lender.
Red flags when buying a house include structural issues (foundation cracks, sloping floors), water problems (stains, musty smells, basement flooding signs, poor drainage), sloppy renovations (fresh paint covering damage, crooked finishes, DIY work), bad maintenance (old roof, deferred upkeep), and listing/market oddities (long time on market, multiple price drops, little info). Always get a professional inspection to uncover hidden issues with major systems like electrical, plumbing, HVAC, and roofing before buying.