Short Sales for Buyers and Sellers
In today’s real estate market short sale properties are a common occurrence. When you buy a short sale, you sometimes can get a great house for an excellent price. But short sales aren’t for the faint of heart or for someone in a hurry. While there are some advantages to purchasing one, it’s a good idea to fully understand the process before pursuing purchasing one.
Similarly, if you are a seller considering listing your house as a short sale, there are several things you must consider in advance as well. Let’s brief on the buyers side of purchasing a short sale and then look at the sellers side.
WHAT BUYERS SHOULD KNOW ABOUT SHORT SALES
What is a Short Sale?
A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. Be aware that the seller need not be in default — to have stopped making mortgage payments — before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
Check the Public Records
Do your research before making an offer to purchase. As your agent, we can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer. If there are two loans, you could have a problem. The first mortgage lender’s position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation. As your agents we can advise you on how best to position your offer with the bank and provide you with all the information you need to make an informed decision. Often, involving a real estate attorney is important if negotiations are particularly tricky or if the seller has an attorney but their attorney is not negotiating on your behalf. Each property and situation is different in this respect.
Hire an Agent with Short Sale Experience
It’s one strike against you if the listing agent has never handled a short sale, but it’s even worse if your own agent has no experience in that arena. You need an experienced short sale agent. That is where we come in! An agent with experience in short sales will help to expedite your transaction and protect your interests. You don’t want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.
Qualifying the Property and Seller for a Short Sale
A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender. Sellers may also owe taxes on the amount of debt that is forgiven.
Submit Documentation and Purchase Offer to Lender
Once the seller has accepted your offer, send it to the lender for approval. You do not have a deal until the lender accepts. Also, send the lender a copy of your earnest money deposit, usually in the form of a promissory note. Do not be astonished if the lender asks you to increase it. In addition, the lender will want to see that you have your own loan available and you are preapproved. As part of the offer package you will also end a preapproval letter to the lender. As your agent, we will frequently also send a list of comparable sales that support the price you are offering to pay for the home.
Give the Short Sale Lender Time to Respond
Make your offer contingent upon the lender’s acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel. Some lenders submit short sales to committee, but most can make a decision within two to three months, sometimes even faster as many lenders have streamlined their approval process in the wake of a large volume of short sales in the market.
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property “as is,” which means no repairs. It is extremely important that a buyer obtain a home inspection and we will always suggest it to buyers we represent.
So, why should you consider buying a short sale? It boils down to the bottom line. You will usually get the property for a substantial discount. Since the lender is eager to continue to get paid the money it loaned out, it may also offer favorable financing terms. Since the sellers play an active role in the short-sale process, you will have their cooperation (and most likely won’t need to evict them upon taking possession of the home). This is not always the case with a property that has gone through foreclosure.
A typical short sale transaction takes 3 -5 months. Therefore, if you are in a hurry, short sales are not likely the right choice for you. Talk with us about REO’s (see section on “buying foreclosures”) or properties that are not distressed in any way. Yes, there are still sellers who are not underwater on their mortgage!
WHAT SELLERS SHOULD KNOW ABOUT SHORT SALES
Should I consider listing my house as a short sale?
A short sale occurs when your lender agrees to accept a lower price on your home than the current mortgage balance, provided you meet the lender’s requirements and have a qualified buyer. To go the distance on a short sale, you must document you are a hardship case — but not because you falsified the original loan documents.
It can be a win-win scenario — the bank reduces a portion of “bad debt,” avoids foreclosure costs and keeps the home occupied, while you shed a housing payment you can’t afford. To prove your case, you’ll need to spend some time on a cover letter explaining your hardship and provide full financial disclosure; the original purchase contract; a balance sheet of your income and expenses; asset statements, proof of income; bank statements; two years of tax returns; and a professional who knows the ropes. Your house must be marketable and if you have a 1st and 2nd mortgage, the second mortgage must be able to get a “cut’ through the deal – either from the bank offering a percentage of the approved sales price or out of pocket from you. Some second lenders require homeowners to sign a promissory note for the balance – it’s best to discuss this with your real estate attorney or real estate agent (although, we agents are not attorneys and cannot give legal advice). Generally speaking, your goal as seller is to sell your house without further obligation to either bank.
If you’re a seller, a short sale is likely to damage your credit — but not as badly as a foreclosure. You’ll also walk away from your home without a penny from the deal, making it difficult for you to find another place to live. As agents, we have seen people whose credit has improved significantly one year after a short sale or foreclosure. You won’t be able to purchase another house again that soon – generally three years after either event is the time you will have to wait. But you can start breathing freer sooner than later if you manage all your other credit obligations wisely.
What does the short sale process look like?
- Offer is submitted to you, you sign the purchase and sale and your agent submits the purchase and sale along with the short sale package (outlined above) to the bank.
- Ten to thirty days later (10 – 30 days) the bank acknowledges receipt. Some banks have streamlined their processes such that this time is on the shorter end than the longer end.
- Thirty to sixty (30 – 60 days) later the bank orders a BPO (the bank asks an independent real estate agent to give a price opinion) or an appraisal
- Thirty to sixty days (30-60 days) the file is reviewed by the bank
- Thirty to sixty days (30 – 60 days) later a negotiator is assigned
- A tier two level negotiator may then be further assigned – this can be often as much as 90 days out.
- Sixty to one hundred and twenty days later (60 – 120 days) the offer is approved, countered or rejected. Often the bank will require additional or new contractual elements that must be signed for the deal to go through – this includes usually a statement that the house is sold as-is and without warranty
There is a lot of information to consider when purchasing or selling a short sale property – luckily, you have the benefit of knowledgeable real estate professionals to help you through every step of the way. Contact us at The Doorway Home Team to learn more.
