Buying a Short Sale

You can get a great deal in buying a short sale that is in above average condition. However, limiting yourself to only looking at short sales is like saying I want to have a headache all the time. They can be complicated, frustrating and after many months waiting, most buyers give up. The key word is PATIENCE!

The objective of this article is to help you understand how a short sale differs from a regular sale. It is not intended to explain the homebuying process, but how the short sale is different. It is first important to understand, "What is an Actual Short Sale?"
A short sale is one where at the settlement the sales price is insufficient to satisfy the total of all liens and costs of sales and the seller does not have sufficient liquid assets to cure all deficiencies. A potential short sale is one where the listing agent reasonably believes the sales price may not be enough to satisfy all the liens and costs of sale, and the seller is unable or unwilling to bring sufficient liquid assets to the closing.

Why would a seller prefer to do a short sale? For this let us compare what can happen in a short sale versus foreclosure and see why a seller prefers the short sale.

- If the seller wishes to purchase real estate in the future and get a mortgage, and they have focused on maintaining good credit moving forward, with a short sale they could buy in 2 years, with 20% down payment, as long as credit has improved to within acceptable limits. With a foreclosure they will have to wait 7 years.

- In any future loan application the seller will need to disclose the foreclosure, not the short sale. The foreclosure would stay on the credit report for 7 years vs. none for the short sale.

- On a foreclosure, credit scores drop 250+ points, while on short sale, if only one month behind, they could go down as little as 50 points.

- Because of the traceable financial fault of a foreclosure, which many employers frequently verify, an employer may fire an employee or not hire a qualified candidate. Also, a security clearance may be lost or denied because of a foreclosure causing the seller to potentially loose income. Security clearance is not affected with a short sale.

- In a short sale the seller's objective is to eliminate or reduce any burden due to paying short. In many states, a foreclosure lienholder has 5 years to chase down the past debtor to pay the difference between their sale price and debt owed, coupled with additional expenses, exposing the seller to much liability.

It is important for you to know that not all short sales end up sold. Sometimes the bank either has the property insured and it makes more sense for them to foreclose, or the bank believes the price is too low. Nowadays, most banks will counter with negotiation, but some prefer to foreclose. Remember, if a deal is too good to be true...it probably is.

Once you identify the short sale home you want to buy, it is important to find out if the seller has an FHA loan or Conventional or VA. If Conventional, it is important to find out if it is secured by Freddie Mac or Fannie Mae, or the private mortgage securities market. Then find out if it is the original loan or if the seller refinanced. If they refinanced and took out cash beyond what was required to settle the loan, the lenders tend to want repayment, and there is a lesser likelihood of the deal going thru.

Almost all short sale properties are being sold "as is". This means that the seller will not make nor pay for any repairs, since afterall the seller is under a heavy financial burden that caused him to fall into this situation. This is critical since if your lender requires repairs to be made, you the buyer will need to make them, with the seller's authorization.

Once a short sale property is found, an offer is made and agreed to, the offer needs to be signed/initialed and delivered to all parties and there is a binding 'Ratified Contract'. Just as the buyer has many contingencies, the seller will have the contingency of the seller's bank(s) with respect to allowing the transaction to go thru. The bank process is very long, mostly since banks are overwhelmed with requests. Once the bank begins to work on the file, it takes 60-90 days for the bank to approve or deny approval. However, there can be delays caused by many factors.

Expect delays and surprises because sellers that are in default do not always tell their agent how far behind they are on mortgage payments or home/condo owner association payments or that there may be additional liens and judgements on the property, which will need to be cured/satisfied before the sale goes thru. The buyer does not inherit another's debt or economic problems.

Once the bank approves, it is critical that the buyer's agent receive a copy of the approval letter, to see if there are any repayment conditions required of the seller, that the seller sign a promissory note and send to their bank before the buyer proceeds.

You can get a great deal on a short sale. It is key to have a Realtor experienced in these matters to help you increase the likelihood that you can get the property and that the deal goes thru. Click on the following link to send me your information so we can get things going!