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While short sales can offer tremendous buying opportunities for potential home owners it is important to understand exactly what is involved in purchasing a short sale before deciding if this is the route you want to pursue when purchasing your home.
What is a Short Sale?
A short sale means the seller's lender is willing to accepting a discounted payoff to release an existing mortgage. A short sale situation is one in which the home owner owes more money on the loan than the sale of the property will likely produce if it were sold today and the seller is unable or unwilling to bring money to closing.In a short sale, the home owner is basically asking the banks permission to sell the home for less than what they owe the bank.For a short sale offer to be accepted, it has to be approved not only by the seller but also primary mortgage holder and also any secondary lien holders.
Be aware that the seller need not be in default -- to have stopped making mortgage payments -- before a lender will consider a short sale.
Normally, it has been traditional that the current owner of the property has to show a financial ‘hardship’ (such as job loss, medical bills, etc) before the bank will even consider approving a short sale.However, in recent months, some lenders have begun considering approving short sales if the seller is current on their payments but the value of the home has fallen below what they owe on it. In this case, they may approve the sale of a discounted price so that it brings the price in line with market value but it usually won’t approve a sale too far below it.
Ideal Buyer Candidates for Short Sales Are Those Who:
- Do not have to sell their current home before purchasing a short sale property
- Are cash buyers and can submit proof of funds.
- Are preapproved already (if they are not a cash buyer)
- List few or no contingencies in their offer to purchase the home
- Understand that it is the bank as well as the seller that has to approve the short sale.
- Have realistic expectations in regards to the time frames it can take up to six months and sometimes even more before the bank determines if they will approve the short sale. (See new HAFA Guidelinesabout maximum response time by lenders to grant approvals).
- Is willing to make a reasonable offer as ‘lowball’ offers are routinely rejected outright by the bank and waste both the banks and potential buyers time.
- Understands that if there is more than one mortgage/lien on the property (ie second mortgage, HELOC), then all mortgage holders have to approve the short sale.
- Has the financial resources to repair and rehab the property, if necessary.If the home is a fixer upper, they have already arranged for financing to do the repairs (ie, taken out a FHA 203K Rehab Loan).
- Are willing to consult a real estate attorney and accountant about the issues related to purchasing a short sale such as deficiency judgments and tax ramifications.
The Short Sale Process for Buyers:
First and foremost, hire an experienced Realtor, preferably one that has earned their Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors as short sales are very complex transactions that if not handled carefully, can easily fall through with the end result being the buyer loses the property as the offer is rejected or the house goes to foreclosure.
Based on the type of home you would like to purchase, have your agent search for matching short sale properties in the MLS database.
Before writing a short sale offer, the agent should pull up a list of comparable homes that sold in within the last 6-12 months in that same area in order to look at determine the offer price based on recent price trends.
The short sale list price advertised by the listing agent may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers in the hopes the bank will accept the highest one.In all cases, it is the bank that determines the bottom line net price they will accept for the short sale to be approved.
Do your research before making an offer to purchase. Your agent can find out who is listed on the 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 as both lenders need to approve the short sale for it to go through.. If a seller owes $160,000 on the first mortgage and $40,000 on the second, offering $160,000 to the first lender is not enough for them to offer anything to the second lender.If the second lender isn’t given anything, they normally will not approve the short sale in which case the home would go to foreclosures.Make sure that when presenting an offer, you are offering enough so that the first can give something to the second to gain its cooperation.
The buyer agent will present the offer to the listing agent representing the seller. If the seller approves and signs the offer, then the listing agent submits it to the lender for approval along with the other documentation including the:
- Listing agreement
- Buyer's preapproval letter and copy of earnest money check
- Seller's complete short sale package
- As an incomplete sellers package is one of the primary reasons today why a short sale offer is rejected, it is critical to find out if the listing agent has received a completed short sale package from the seller and if so what were the contents of the package.You don't want your short sale purchase delayed because the listing agent doesn't have the required documents.
- A complete seller's short sale package consists, at a minimum, of the following:
- Letter of authorization, which lets your agent speak to the bank.
- HUD-1 or preliminary net sheet
- Completed financial statement
- Seller's hardship letter
- 2 years of tax returns
- 2 years of W-2s
- Recent payroll stubs
- Last 2 months of bank statements
- Comparative market analysis or list of recent comparable sales
As part of the offer to purchase, include a Short Sale Addendum which allows you to back out prior to and after a lender has sent written approval of the short sale. This way you can continue looking at homes if the short sale is taking too long or you can back out at any time if something better comes on the market.
The signed short sale addendum should also state that the buyer/seller agree that that your initial deposit should be held uncashed until the Day After Seller delivers you a written notice of Short Sale Lender's consent - short sale approval letter.Only after the short sale has been approved should the escrow account be opened.It is a widely spread myth regarding short sales that the escrow must be opened in order to submit the short sale package to the bank for approval.This is not true as if the lender has not approved the deal, you don't have a contract. If you don't have a contract - you can't have escrow.
A contingency should be included to allow the buyer to back out of the contract if the appraisal from the buyer’s lender comes in below the approved purchase price or if the cost of repairs exceeds a pre determined dollar amount as most lenders will NOT do any repairs and the buyers must accept the property in “as is” condition.
GetAll Necessary Home Inspections Done Before the Lender has Approved Your Offer.
There are a couple of reasons why I want all inspections done sooner rather than later. If there is a large issue that is going to kill the deal it is better to find out now and use the inspection contingency to get out of the contract before you take yourself out of the market for 3+month and then find out about it.
Secondarily, Once the bank/investor approves the final HUD based on the agreed price there is no changing it. This means that if you wait for that to happen and find some smaller issues that can start adding up, there is no room to re negotiate the price. If you have the inspection before the final offer is presented to the bank, the sale price can be negotiated accordingly It is a lot easier to wait the bank out knowing that you have made the best deal possible and that you know of all existing problems, the cost of an inspection is a small price to pay for that.
Finally, once the short sale is approved, some banks require closing to occur within one to two weeks.If the buyer waits until the bank approves the short sale before doing inspections, there may not be enough time to get them done before the bank mandated closing date.
The loss mitigator at the lender will look at the BPO (Broker Price Opinion) and the HUD (preliminary net sheet) and determine if the payoff amount on the HUD fits their criteria to accept a short sale. Many times, banks will nickel and dime each line item of the HUD and say they won't pay for certain things.
The buyer’s lender will order an appraisal of the property to determine the fair market value of the property which will help the lender in determining if they will approve the loan. As mentioned earlier, a contingency should be included in the offer to allow the buyer to back out of the contract if the appraisal from the buyer’s lender comes in below the approved purchase price.
Lender(s) Will Make a Decision Whether to Approve the Short Sale or Not.
One problem sellers have faced in the past when seeking approval of the short sale is the bank sometimes foreclosed on the home while the short sale was still in the process of being approved.Why did this happen?Because after the Notice of Default is sent to the homeowner (normally after they miss three consecutive months of payments), the Notice of Sale is posted that advised the date the home will be put up for sale by auction.Often, lenders have two different departments and staffs that work separately on the short sale and foreclosure process.If the short sale department is not communicating with the foreclosure department, it is possible the property will be foreclosed on prior to the short sale getting approved.
NOTE:Under the new Home Affordable Foreclosure Alternatives (HAFA) guidelines, all lenders that participate in the HAFA program must agree not to foreclose on a property during the short sale process.
What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise.Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to guiding you through the process, setting realistic expectations, and streamlining your path to homeownership.Call me anytime at (910) 787-2160 to set up a free, personal consultation.
If you are considering buying a short sale or foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on.For your protection, I suggest that all borrowers:
- Obtain legal advice from a competent real estate lawyer to discuss title issues, changes to land use, sellers right to redemption and a host of other issues.
- Call an accountant or CPA to discuss short sale and foreclosure tax ramifications
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