This page is intended to help you understand a short sale.
THINKING OF MAKING AN OFFER ON A SHORT SALE? WHAT YOU NEED TO KNOW……
It pays to know a little about the seller’s situation before you make an offer. The short sale process is complicated and AGE Realty can help you understand the process, the risks and the benefits.
If a home is being sold for below what the current seller owes on the property-and the seller does not have other funds to make up the difference at closing-the sale is considered a short sale. Home owners may find themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home, unexpected medical emergencies and/or declining home values in a slower real estate market.
A lender often needs a contract (Purchase & Sale Agreement) between the seller and buyer before actually initiating the short sale process on their end. The seller must have a hardship that is acceptable to the lender in order to qualify for a short sale along with that Purchase & Sale Agreement. Once an offer is accepted by the seller, the contract is sent to the lender, along with the proof of hardship. The lender will either take in or reject the documents depending on the timing, if the property is under foreclosure, known as lis pendens. If the lender does not take in the seller documents, you can request the seller appeal this decision (it helps to back the appeal with comparable sales data). If the lender takes in the seller documents for review, they will most likely order a Broker Price Opinion, known as a BPO, to evaluate the current market value of the property. During this time they will also review the sellers hardship and the contract terms between the seller and the buyer. After the BPO comes back, the bank will review the file, accept, reject or counter the sellers contract with the buyer. Keep in mind that the contract is between the seller and the buyer, but in order for the seller to be able to transfer the property, the bank has to accept the contract. If the bank says to the seller that they need more money or different terms, the seller can go back to the buyer and request this or the seller can make up the difference if possible (not very common since they can’t afford their mortgage payments anymore, but maybe they can find a friend or family to gift the difference). The seller can’t afford mortgage payments anymore due to a hardship, the seller owes the bank more money than what the property is worth, hence the shortfall amount, which creates the opportunity for a short sale. Please keep in mind that different lenders may have different requirements and procedures for short sales.
A short sale is different from a foreclosure, which is when the seller’s lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. (A deed in lieu of foreclosure can be an option to lessen the credit damage for homeowners who can no longer pay their mortgage, if you need more info on this, just ask me.) But a SHORT SALE holds many potential pitfalls for buyers.
Know the risks before you pursue a short-sale purchase.
You’re a good candidate for a short-sale purchase if:
- You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale. One of the most important things to keep in mind with short-sales is the longer it takes the seller to submit lender required documents, the longer the entire process will take. Most homeowners are not very excited or have the urgency to submit documents that the lender requires.
- Your financing is in order. This actually applies to all listing types, especially in a seller’s market. Preapproval is different than prequalified. All lenders will provide preapproval without commitment or harm to your credit. Lenders like cash offers (shocking, who doesn’t like cash?). But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. I call it buying power (wouldn’t you want proof that a potential buyer offer is able to finance or afford your home?). If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
- You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short sale property–or you need to be in your new home by a certain time–a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.
If you’re serious about purchasing a short sale property, it’s important for you to have expert assistance. Here are some professionals that you want to work with:
- Experienced real estate attorney. Only about two out of five short sales are approved by lenders. But a good real estate attorney who’s knowledgeable about the short-sale process will increase your chances getting an approved contract. Also, if you want any provisions or very specialized language written into the purchase contract, a real estate attorney is essential throughout the negotiation.
- A qualified real estate professional.* You may have a close friend or a relative in real estate, but if that person doesn’t know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few practitioners and ask them how many buyers they’ve represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help you negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLS’s permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as “lender approval required.”) Our MLS in SWFL requires short-sales to be indicated on the listing. This is a much more complicated process. The easiest choice that you can make is to contact Rob Iafrate, I have the experience and knowledge to help.
- Title officer. It’s a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic’s lien, homeowners association lien, etc.), it’s much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you’ve waited for months for lender approval. If you don’t know a title officer, your real estate attorney or real estate professional should be able to recommend a few.
Some of the other risks faced by buyers of short-sale properties include:
- Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Or the lender could make a counter offer, which will lengthen the process.
- Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you.
- No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits.
The risks of a short sale are considerable. But if you have the time, the patience, and the iron will to see it through, a short sale can be a win-win for you and the sellers.
*Not all real estate practitioners are REALTORS®, a REALTOR® is a member of the NATIONAL ASSOCIATION OF REALTORS® and is bound by NAR’s strict code of ethics.
Note: This article provides general information only. Information is not provided as advice for a specific matter. Laws vary from state to state. For advice on a specific matter, consult your attorney or CPA.
Source: REALTOR® magazine (REALTOR.org/realtormag) Copyright 2008. All rights reserved
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*The data relating to real estate for sale on this website comes in part from the Royal Palm REALTOR® Association. The information being provided is for consumers’ personal, non-commercial use and may not be used for any purpose other than to identify prospective properties consumers may be interested in purchasing. Information deemed reliable but not guaranteed.