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Are you looking to buy a short sale? In this article, we will cover the basics of how to buy a short sale, as well as some basic tips (such as contacting a real estate attorney CT to help advise you on the best financial decisions for deals of this nature).
A short sale is when a property is sold at a price lower than the amount the homeowner owes on their mortgage. Typically, this is done with the approval of mortgage lender(s) under a number of circumstances, including:
• the property worth less than the balance of the mortgage,
• the borrower cannot continue to make the monthly loan payment,
• and/or the borrower doesn’t have enough money to pay back the full balance of the loan and needs to move out of the property in a short timeframe.
As you can imagine, the mortgage lender’s approval is necessary for a short sale because they will be receiving less than the amount the borrower owes on the mortgage. Additionally, the lender must verify that the homeowner doesn’t have the ability to pay the mortgage and has determined that a short sale is a better option than foreclosing on the property.
The advantage of a short sale is that the seller of the house avoids foreclosure and the fallout from that event (i.e., lower credit score), giving them the opportunity to move into a more affordable property. For the buyer, they receive property at FMV (fair market value) and avoids the risk associated with buying a foreclosed property. Lenders get to mitigate theirs loses and recoup as much value of the property, as well as going through the process of foreclosing a property and reselling it. Therefore, a short sale is the best course of action for multiple parties in the event that a homeowner can’t make their mortgage payments. Of course, before committing to purchasing a short sale, make sure to check in with a qualified real estate attorney CT to ensure that the transaction is up to par and there are no potential hold-ups.
First, the major pitfall of a short sale is that it takes more time than a traditional retail sale for properties. Considering that there may be more lien-holders involved in the home, including second mortgages, HELOC lenders and so forth, those parties may also need to approve the short sale. Second, because the seller may have fallen on hard financial times leading to the short sale, the property may be in poor condition and be sold in an “as-is” condition—leading to more costs down the road. Third, the seller of the property usually must pay some money at closing or agree to an unsecured debt to ensure that the short sale approved. If the seller refuses for any reason or can’t shell out the cash for these terms, then a short sale may fall through. Last, because short sales are designed to be no-frills, the buyer typically has to shoulder the burden of costs that are typically covered by the seller in most home sales (i.e., inspections, repair concessions, etc.)
There are a number of methods for finding short sale properties. These include:
• Using online databases, such as MLS (Multiple Listing Service) and Zillow.o While searching, be sure to look for critical phrases besides “short sale,” including "subject to bank approval," "preforeclosure," "third-party review required," and "pre-approved by a bank." Each of these phrases can indicate how quickly the home can be sold and whether your short sale offer will need to be approved by the seller's lender(s).
• Consult real estate professionals that have experience in short sales (including real estate agents and real estate attorneys CT)
• Drive around neighborhoods and look for signs that indicate “for sale by owner,” which may indicate a motivated seller.
Be forewarned that there may be a number of reasons that a mortgage lender will not approve a short sale, including:
• The homeowner has filed for bankruptcy. Because negotiating a short sale is considered a “collection activity,” it is prohibited in bankruptcies.
• The foreclosure process is too far along to complete a short sale transaction instead.
• The mortgage lender initially approved the short sale. However, the homeowner refused to make a contribution to help reduce the lender's losses.
• The homeowner may still have the means to pay off the mortgage and can’t provide legitimate reasons why they shouldn’t pay the mortgage.
• The mortgage lender has determined that the payout from private mortgage insurance (PMI) could reduce the loss enough and chooses to foreclose the property instead.
• A short sale is not likely to close because the property title is not clear, possibly due to subordinate liens, and isn’t easily transferable.
• Indications that the short sale may not be an "arm’s length" transaction, which means that the buyer of the short sale must be unrelated and unaffiliated with the seller.
If the sale does go through, a settlement statement (known as a HUD-1) illustrates how the money from the short sale is distributed to all of the participants in a real estate sale. Before the seller's mortgage lender gives its approval for the short sale, they will look at the proposed settlement statement for the following:
• Proposed closing date
• Buyer’s financing source(s)
• Real estate professional commissions (i.e., from real estate agents)
• Payment to cover outstanding taxes and liens
• Expenses that may raise red flags and conflicts of interest
In order to increase your chances of a successful purchase on a short sale property, your order needs to be competitive. This means that the offer should be close to the market value of the property vs. the listing price. However, if there are other bidders looking to purchase the home, you may need to adjust your bid to beat out lower offers. One way of estimating the home’s value is by looking at similar homes that have sold in the area recently.
Be forewarned that starting with a lowball offer can actually put you out of the running for a short sale if you go too low. Because many banks are overwhelmed with short sale requests and multiple offers, they may automatically rule out any counter offers if you submit a lowball. Remember that if the short sale makes the lender take a more significant loss than a foreclosure, the lender will typically foreclose to recoup as much money as possible.
Your submitted offer should include:
o The purchase contract, which should include the buyer’s and seller’s signatures.
o An earnest money deposit, which is considered part of the down payment (if the transaction isn’t cash-only). To the bank reviewing the offer, a sizeable deposit means the buyer is a serious buyer.
o A pre-approval letter that serves as proof that the buyer has the ability to purchase the short sale property at the proposed price.
o Relevant information about recent home sales for similar properties in the same area, with comparable prices to what the buyer is offering to pay for the property.
Once your offer is submitted, make sure to follow up diligently to track the review and approval process. It’s recommended that buyers obtain the name and contact number(s) of key staff members at the lender’s loss mitigation department to follow up with. Because the buyer will need authorization from the seller to allow the mortgage lender to discuss the seller’s loan, it’s important to state your intentions clearly to the seller to expedite the buying process.
Last, in many cases, you’ll need a short sale addendum to finalize the transaction. This document is included in many short sale transactions, as it provides details including:
• Bank’s approval of the short sale.
• The specific time period the buyer is willing to wait for short sale approval.
• Release date and amount of the buyer’s earnest money deposit.
• Property Inspections.
• Concessions, which include the costs that the seller and buyer may be responsible for as a result of executing the short sale contract.
• Consideration of multiple offers on the property.
As you might imagine, it is essential to work with a real estate professional with experience in short sale transactions (such as a real estate attorney CT) to ensure the short sale addendum includes the items that will protect the buyer’s interests during both the short sale review and execution process.