Before Buying a Short Sale Home
Buyers pursue short sales to get a good deal, and they firmly believe buying a short sale will present that opportunity. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like hot fudge on a sundae, ask your agent to call the listing agent to find out if the home is a short sale.
Because you might want to think twice about making an offer on a pre-foreclosure, short sale home. It's not as simple as you may believe and very few can close in 30 days or less.
Many of my Sacramento home buyers wait 6 weeks to 6 months to close on a short sale, sometimes longer.
What Is a Short Sale?
A successful short sale means the seller's lender is willing to accept a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. That's because sellers need to qualify for a short sale. If their agent sells very few short sales, that's a red flag for your buyer.
Be aware that the seller need not be in default—to have stopped making mortgage payments—before a lender will consider a short sale.
A lender may consider a short sale if the seller is current but the value has fallen. The seller may be over-encumbered, that is, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who is in 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.
Remember, banks are not under duress to accept a short sale so the offer needs to be reasonable.
If there are two loans, you could have a problem. The first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation, but it's not nearly as much you would think. Often $3,000 to $6,000 is acceptable.
Hire an Agent with Short Sale Experience
It's one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. Don't go into a situation where you have the blind leading the blind. You need an experienced short sale agent who can anticipate surprises and stop problems from happening.
An agent with experience in short sales will help to expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one bothered to follow up in a timely manner.
Qualifying the Property and Seller for a Short Sale
A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender. Sellers may also owe taxes on the amount of debt that is forgiven.
A seller I know once demanded that the buyer slip the seller $1,000 to be given the right to purchase the seller's property. We said no. This is fraud. The lender legally pursued that seller. Do not be lured by sellers who suggest this practice. In a short sale, the seller typically receives no money because the lender is losing money. A HAFA short sale was once an exception, but those no longer exist.
Submit Documentation and Purchase Offer to Lender
Once the seller has accepted your offer, the listing agent will send it to the lender for approval. You do not have a deal until the lender accepts. Also, the lender will want a copy of your earnest money deposit and proof of funds. Do not be astonished if the lender asks you to increase your sales price.
In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a current preapproval letter for the lender, dated within the last 30 days. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.
Give the Short Sale Lender Time to Respond
Make your offer contingent upon the lender's acceptance. Give the lender a time frame in which to respond, after which you will be free to cancel.
Some lenders submit short sales to committee, but most can make a decision within two weeks to three months. The listing agent should have the appropriate contact information for the lender.
As a buyer, you cannot contact the lender nor can your agent, so be patient.
Understand Short Sale Commissions
Regardless of the commission the seller has agreed to pay, the lender is the entity approving the commission. Although the seller is not keeping any of the money, the seller still pays the commission from the proceeds of the sale. The lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.
If you have signed a buyer's broker agreement with your agent, ask if the agent will waive the difference due or you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent, but the lender is calling the shots.
Reserve the Right to Conduct Inspections
Generally, the lender will not allow a seller to pay customary items that a traditional seller would pay. These include home protection plans for the buyer, roof / pest / termite inspections, and pest completions. A buyer will be asked to purchase the property "as is," which means no repairs.
It is extremely important that a buyer obtain a home inspection. Back to How to Handle Short Sales
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.