How To Buy A Short Sale
A short sale is an opportunity for a buyer to purchase a property at well below market price. This process may be preferable to buying a home through a foreclosure, which could become costly and mired in red tape and paperwork.
Still, a short sale is no fast, easy deal. There are many pitfalls and red flags (listed here) that can leave buyers with remorse if all the fine points of the sale are not addressed.
Here’s a very general overview of how to approach a short sale.
What is a short sale?
It’s called a short sale when a house sells for less than what its owner owes on it. What’s more, the lender doesn’t get all the original money back.
The only one who can allow a short sale to proceed is the lender (usually a bank) who would “forgive” whatever amount is left on the loan. This may happen when the home’s value decreases and the mortgage holder is underwater: owing more than the home is actually worth. As a result, the home has no equity. In fact, it has less than no equity, and that’s called negative equity.
Lenders don’t like short sales. They’ve become rare, and it may take a long time for the lender to finally agree to go with that solution.
Note: a seller is not able to approve a short sale; only a lender can do that.
Don’t confuse a short sale with these other types of transactions:
- Foreclosure: whereas a short sale is voluntary, a foreclosure is involuntary. The lender takes legal action to take back control of the property. Foreclosures also cause great damage to the seller’s credit score.
- REO: this means “real-estate-owned property,” or a property owned by a lender (bank) because it did not sell in a foreclosure. The properties are often given to real estate agents to sell and are offered “as is,” which could mean trouble for the buyer.
When exactly does a short sale happen?
If a borrower misses between three-to-six months of mortgage payments, he is served with a notice of default. This would usually lead to a foreclosure proceeding, but the borrower’s last grasp could be a short sale instead.
Another short-sale scenario could be when the property value is no longer in line with the worth of the house or the mortgage payments. This happened quite often during the housing crisis of 2008.
Why a short sale is not a good idea for the seller
- A short sale will more than likely damage the seller’s credit rating.
- A seller will lose all the money paid into the property so far, which makes it financially difficult to find another house.
What’s in a short sale for a buyer
- The buyer will get the property at a reduced price, although it may take a lot of paperwork to get the deal going and eventually completed.
- The buyer negotiates with the seller before the short sale can be approved by the lender. The seller is usually in desperate straits, and may be open to a negotiation that would benefit the buyer.
- The lender receives the proceeds of the short sale, but the buyer is still required to pay the seller the balance of the loan.
- The buyer may have to pay for all necessary repairs and required upgrades before the deal can go through.
Where do you find short sales?
Like everything else, most all short sales listings are available online, though real estate brokerages, courthouse listings and auction.com.
Never buy a property sight unseen. Be sure to view the property in person, and inspect the interior if allowed. Calculate how much it may cost to repair or renovate, and if all that work will be worth it financially.
Considering a short sale? Be sure to pay heed to these precautions:
- Get a home inspection
A foreclosure or short sale may lead the owners to physically take out their frustrations on the house, or the house may have been a money pit to begin with. Be sure to know if the house is afflicted by termites, molds, leaks, sewage issues or other common household problems.
- Get insurance and permit approval
Is the house located in a flood plain? Has there been a fire? Do you need a permit to do the renovations, repairs and upgrades that you need to do? Make sure this is ironed out ahead of time.
- Be aware of any and all liens on the property.
There may be liens on the property; make sure you know what they are (and how many). Make sure the seller is responsible for paying these liens.
How to secure a short sale: work with the lender.
Since the lender is the one who will give a short sale the green light, your job is to convince the lender that a short sale is the best strategy.
- The lender working on the short sale may agree to give you a loan (if your credit is good). This could speed up the process tremendously.
- In order to discuss the mortgage with the lender, you will need permission from the seller. This usually involves an authorization letter, written and signed by the seller.
- The lender should have you complete and sign a short sale application. This will be considered along with any other paperwork the lender suggests be included.
- Convince the lender that it’s best to offer you a short sale. Present a written proposal that includes all the costs involved in the property, and how much it would cost to repair or rehab it. Include photos of damages, flaws and issues throughout the property.
- Present a “hardship letter” to the lender. The letter, coming from the seller, should detail why they cannot continue making the mortgage payments. The letter should help convince the lender that a short sale is a viable, practical option.
A short sale can be beneficial to a buyer, but it can also be complicated and frustrating. It may take a long time to close, if it closes at all. Be sure you know what you are getting yourself into before moving forward with a short sale — the more you know, the better you will be able to negotiate, or walk away if the deal seems unworthy.