Interested in Buying a Short Sale? 

Here is what you need to know before making an offer

Buyers searching for a great bargain on their home purchase may consider a short sale transaction as most homes for sale that require a short payoff from the seller will be priced below market. Short sales may be a great alternative over foreclosures/REO's or even regular sales, but they also have their own unique challenges.

For any of you that invest in the stock market, we're not talking about short selling a home the same way you would short sell a stock. A short sale on a home happens when the homeowner must sell their property for less than what they currently owe to their mortgage holders.

A short sale typically is executed to prevent the homeowner from having their property foreclosed or repossessed by their bank. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than the foreclosure proceedings.

A short sale requires much paperwork and preparation on behalf of the borrower, and the lender agrees to discount the loan balance due to an economic or financial hardship on the part of the borrower. Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender.

Special Considerations for the Buyer:

Since a short sale transaction is never a guaranteed solution for the seller, i.e. the seller's bank is not obligated to accept a short payoff on their outstanding loan, buyers who decide to make offers on short sale properties should be aware of several important considerations:

1. Buyers should consider receiving professional assistance when purchasing a short sale: It's crucial for Buyers of short sales to work with someone who is experienced and knowledgeable in short sale transactions whether that person is a licensed REALTOR®, real estate attorney or other qualified professional. REALTOR®s have tons of resources available that can help guide a buyer through the short sale process, from making the offer to protecting them from traps such as the Notice of Default purchase requirement for California if the seller is in foreclosure and the buyer is an investor.

2. Short sales can offer great savings over competing listings, but only if the buyer is willing to wait: The listing agents understand that to produce an offer on a short sale they will need to drop the sales price 10% to even 15% under-market to make the sale worth while for a buyer to stick around long enough to close escrow. Since most lenders will not even consider a short sale until the seller has become delinquent on their mortgage, and not until the seller has been able to market the property for sale and produce and offer, there is usually no way to expedite a short sale transaction and buyers should be ready to wait 2 and even 3 or more months for the seller's bank(s) to approve their offer. So Buyers who either need to sell their home as a contingency of a purchase offer, or those that must be in a new home within a specific time period may want to reconsider purchasing a property involved in a short sale.

3. Short sales are becoming more efficient and popular among lenders: Over the past year foreclosing lenders are not only recognizing that short sales may be the best way to reduce their losses rather than repossessing a property, they are also becoming more efficient at processing them. With abundant pressure to get these under-performing loans off their books, lenders are focusing on streamlining their short sale and loss mitigation departments to ensure quicker approvals of short sales.

4. Short sales are more attractive to sellers than a foreclosure: Short sales are less damaging to a seller's credit history than a foreclosure and offer the seller the ability to negotiate the repercussions from a short payoff. Short sellers will also be able to qualify for future purchase financing sooner than those who suffer a foreclosure on their record. And, since the foreclosure process is usually longer and costlier to the seller's lender than a short sale, most lenders are open to negotiate with sellers regarding the treatment of how they report the short sale to the credit bureaus and how they handle the seller's debt forgiveness.

5. Banks are willing to make deals but don't expect to get a steal: Although the seller's bank will be interested in getting rid of the property they can still foreclose and repossess the property instead of giving it away for pennies on the dollar. Remember, a bank is a business and they need to cut their losses but only to an extent. If you're interested in making a lower offer on a short sale be sure you check the most recent comparables in the neighborhood and don't expect to get more than a 10% to 15% reduction in market value approved, plus before the lender finally approves the sales price they will verify the property's market value by hiring local appraisers to perform value checks.

6. Due to long approval periods, offering prices on short sales may be re-negotiated: Buyers who may be concerned about other purchase opportunities they may be missing due to the length of time required by short sales should know that their offering price may still be renegotiated lower upon approval. Since the seller's lenders can take months to approve a short sale the local market may also continue to drop which can cause issues when the short sale is finally approved and the buyer's appraisal comes up short. But, with most lenders we have worked with in the past, the lenders are more than willing to renegotiate the sales price to reflect the current market value in order to sell the property and payoff their loan.

7. There is a large potential for rejection: A lender's main goal is to minize their losses as much as possible. If a buyer makes an offer on a short sale listing that is tremendously lower than the fair market value of the home chances are that the lender will reject their offer which could cost the buyer months worth of their time (another reason to work with a REALTOR® whom can advise buyers on probable market values). And even if the lender being shorted accepts the buyer's offer there is always a chance that the seller will not submit to the terms of the short sale approval as it is not uncommon for the shorted lender to demand the seller to carry back a personal note for the amount of the shorted payoff.

8. Most short sale transactions are "As Is,"  but on occasion shorted lenders may approve credits for repairs: Due to the nature of the transaction, short sellers will usually not have the funds available to make necessary repairs or keep up with the maintenance to the property which can leave the house in dis-repair. Depending on the extent of the work, some lenders will be more than willing to consider crediting the buyer for repairs as they would rather receive a payoff on their loan then worry about repossessing the property and then making the repairs themselves before ultimately placing the property back on the market at a lower price. But, some lenders have company policies that prohibit them from allowing any credits for repair items or such.

9. Have a back up plan: It's most important for buyers to remember that short sales are not guaranteed sales. There are many challenges to buying a short sale and although buyers may make an offer they should continue to look for other properties. Buyers should consider all types of sales transactions (short sales, foreclosures and traditional sales) and make offers acordingly.

10. Making an offer on a short sale is still considered a legitimate sales contract: If your offer on a short sale property is accepted by the seller you should be aware that if you put down a good faith deposit, you may risk losing such a deposit if you choose to walk away from an approved short sale to buy another home.

 

Short sales are not a new thing, they have been around for a long time but until recently they haven't been very prevalent as distressed sellers have usually been able to sell their homes for more than their outstanding loan balances. But with today's downward real estate market, lenders are having to face the reality of the situation and accept a quicker loss over the possibility of loosing more due to a longer and costlier foreclosure process.

But just because short sales have become more popular, there are still other sales transaction types available on the market including foreclosures/REO's and traditional sales. And buyers shouldn't get caught up in getting the best bargain if it means settling for a home they do not desire. Don't loose sight of the most important factor when looking for a home to purchase - that the buyers should want to live in the home.