A short sale sounds thrilling, like finding the perfect pair of designer pants on a bargain. Short sales can be wonderful investment possibilities, but there's a lot about these pre-foreclosure listings that bargain hunters and first-time purchasers don't enjoy.

What exactly is a short sale in the real estate industry?

A short sale occurs when a homeowner sells their house to a new buyer for less than the amount outstanding on their mortgage. The deal may profit both parties, but mortgage lenders, who must approve and complete the sale at a loss, do not benefit.

When does a short sale take place and how does it function?

When a homeowner is unable to keep up with their mortgage payments owing to an unexpected financial setback, this is known as a "short sale." It's possible that they'll freely relinquish their possessions. That's true; they plan to vacate the premises and turn over the keys to the bank. The proceeds from the sale will go directly to pay down the mortgage and will not go to the owner.

While the homeowner starts the ball rolling on this pre-foreclosure sale, the lender has to approve the short sale paperwork before they can begin handling negotiations and accepting offers.

Unless the lender has approved the seller's short sale application, the designation "short sale" on the listing will imply nothing.

Instead of waiting for the slow-moving bank to figure out what price they'll settle for, look for "approved" short sales where lenders have already agreed on a price.

If the value of the property is lower than the balance of the mortgage, another short sale option exists. The value of this "underwater" property is less than the sum owed to the mortgage lender. Being underwater on a mortgage is less prevalent now than it was a decade ago, when the housing market collapsed. This is due to growing home values across the country and historically low interest rates.

How do the advantages and disadvantages of a short sale compare for buyers?

There are more disadvantages for people who aren't investors, so let's talk about those first.

The disadvantages of buying a short sale property are as follows:

• Higher initial investment required. Spend as much money as you can afford to in order to make a compelling offer. Cash is a sure bet, which is why it is preferred by lenders who are trying to limit their losses. A bidding war is possible.
• Waiting and closing hours have increased. You should give yourself two to six months to hear back on whether or not your offer was accepted. Time may start over if you make a counteroffer. The lender prioritizes the processing of regular transactions over short sales because of the documentation involved. Normal processing times are slow. This intricate deal may take up to a year to finalize.
• Probability of success is much lower. When there are several lienholders involved, consensus might be difficult to achieve. It could take months to hear back if your offer was even considered.
• An unexpected ransom. There's a chance the principal lender may take your offer, but the secondary lienholders will demand far more money before they'll relinquish their claims, possibly in the thousands.
• This item is being sold in its current condition. Roof leak? Weird odor coming from the cellar? Lender is already in the red and is unwilling to compromise on any necessary structural or cosmetic repairs.
• More money needs to be spent on repairs and upgrades. Get ready to get your hands dirty and do it yourself, or plan for the price of hiring professionals. Oftentimes, investment properties acquired through short sales are in need of repair. Homeowners who couldn't afford their mortgage payments might also have put off necessary repairs.
• Closing charges are paid by the buyer. The buyer could be responsible for the seller's closing costs if the lender requires it. This would never occur during a standard sale.

Finally, the good news. The advantages of buying a short sale are as follows:

• Prices have been lowered. The price may be reduced and you may get more space for your money, but you shouldn't expect garage sale prices. All savings may be eaten up by the price of renovations if the offer isn't close to the going rate for a home like it.
• Excited to sell! Banks and other financial institutions will sell at a loss if they can get a good enough price for their trouble. In contrast to 2008, lowball bids today may not even be acknowledged.
• We'll have less rivals to worry about. The fact that most purchasers lack expertise with short sales means that short sale properties typically receive fewer offers than their non-distressed counterparts is perhaps the biggest benefit.

Can a first-time buyer benefit from a short sale?

In a nutshell: probably not.

In the best case scenario, short sales allow first-time purchasers to get more homes for less money. However, first-time purchasers should be weary of relying on a short sale house as their primary residence due to a number of restrictions, hazards, and delays.

To explain, these are the reasons why:

To be taken seriously, a short sale offer needs a greater down payment to compete. When competing with purchasers who have already been accepted for loans with fewer requirements, popular government-backed VA and FHA loans put you at a disadvantage. It's imperative that you get pre-approved before proceeding. If you're interested in financing, but unsure if a short sale qualifies, it's a good idea to contact a lender directly.

Secondary (or junior) lienholders may reject your offer or require thousands of dollars more to release their liens, even if it has been approved by your primary lender.

And anticipate maintenance. In addition to a sizable down payment, first-time purchasers should have enough cash on hand to make any repairs to the home.

It could take up to a year to close on the sale, even if your offer is accepted and you have the cash on hand.

Investing in a home through a short sale. Suggestions for prospective purchasers

Are you still curious? Short-sale purchasers should heed this advice:

• Seek out a short sale that has been "authorized." An item is not necessarily a short sale just because the listing agent labels it as such. A short sale can only go through if the seller has received approval from their principal mortgage lender.
• Obtain prior approval. Pre-approval from a lender who is aware you intend to finance a short sale is necessary if you require financing.
• Make a sizable initial payment. Be aggressive and lay out lots of money on the table.
• Try to find houses where the equity is low. A lender is more likely to accept a short sale if less of the mortgage has been paid off than the home is worth. Lenders like to foreclose and resell homes with larger equity since it increases their profit.
• Acquire knowledge of liens. Any outstanding liens on a property should be disclosed by the listing agent or seller. However, you should still check with a title company to make sure there are no hidden claims.
• Arrange for a thorough home assessment and reliable repair quotes. Before you close, make sure you've completed these steps. The house is being sold in its current condition. How much time and money will be required to make the property livable? If your offer is accepted, keep in mind that the price may go up to account for necessary repairs.

Are short sales worthwhile?

Short sales may sound appealing, but don't expect deep savings.

It's possible that the seller overpaid for the house during the peak of the market, and now that it's lost value, they're offering it at a discount. For the lender, selling the property at a price near to market value is worth the extra time and effort, if the sale doesn't go through in the meantime.

In a nutshell, first-time buyers considering a short sale must weigh the savings on the home's purchase price against the need for a higher down payment, a less guaranteed conclusion, a longer schedule, and potentially costly repairs. While you're busy with this, a better house that requires less work and has more potential for growth could become available.

The process of closing on a short sale home can be tedious and time consuming. It's not always a bad idea to pay full price for your go-to pair of jeans.