For Sale By Owner Short Sales

Tips For Buying a Short Sale from the Homeowner

Short Sale by Owner
It's uncommon to do a short sale by owner. © Big Stock Photo

A For Sale by Owner short sale is very unlikely to happen in California but could occur elsewhere. For starters, in some states, real estate agents cannot negotiate a short sale and only a lawyer can do it, but that is not true in California. In California, real estate agents handle short sales as part of their commission, without any out-of-pocket expense to the seller.

In California, the banks I work with generally insist that the homeowner hire a real estate agent.

In fact, some banks refer underwater homeowners to agents.

On the other hand, sellers in foreclosure generally don't decide to sell as a short sale on a whim. They first compare how much they can get for their home versus how much they owe. If their mortgage balance is greater than their home's market value, some sellers elect to sell as a short sale. It is generally preferable than walking away and letting the home continue through foreclosure.

A small number of those short sale sellers may also decide to sell without representation. Short sale sellers without an agent are for-sale-by-owner sellers, and this situation requires legal advice that a short sale seller may not want to pursue. That's how they can end up in hot water. They don't hire a lawyer and think they can handle the transaction by themselves.


Who Needs a Real Estate Lawyer for a FSBO Short Sale?

If you are selling a home in a state in which agents do not handle short sales, then the people who need a lawyer are both parties.

Short sale sellers, especially those who are unrepresented, should seek legal and tax advice. But if they refuse to hire an agent, they probably won't hire a lawyer, either. However, that doesn't mean that you should ignore the recommendation to call a real estate lawyer.

If you are contemplating buying a short sale directly from a seller in foreclosure, hiring a real estate lawyer will probably save you money in the long run.

Depending on your state laws, the seller might be able to successfully sue you after closing and regain control of the property. Then you would be out-of-pocket lawyer fees, court fees AND you could lose your home. So, if the seller isn't smart enough to seek legal representation, don't make the mistake of sliding into the same rocking boat.


Writing Short Sale Purchase Offers on a FSBO

Decide on an offer price. To the extent the seller may face short sale tax ramifications on the amount of debt relief or face a deficiency judgment, the seller will likely not have a stake in the amount that you offer. It will be the lender's call. Above all, write contingencies in your offer such as:

Do not give your earnest money deposit to the seller.

Make it payable to a third party such as a title company or escrow company.


Negotiating with Lenders on For Sale By Owner Short Sales


If the seller has not already talked with the lender, advise the seller to write a hardship letter and FAX it to the lender. Before the lender will consider your offer, the lender will want assurance that the seller has no assets to attach. In addition, depending on the lender, it may also want documentation such as:


  • Preapproval letter from your lender.


  • Estimated certified closing statement.


  • Certified closing instructions.


  • Title policy commitment / preliminary title report.


  • Evidence of your earnest money deposit.


  • Profit and loss statement, if you are self employed, and last three month's of bank statements and / or 2 years of tax returns.


  • List of recent comparable sales in the neighborhood.

    Your bargaining power will rest on the comparable sales and condition of the real estate market. Lenders generally use an automated appraisal service, which may not reflect the true market value in the neighborhood. Be ready to point out why factors such as busy thoroughfares, close proximity of railroad tracks or high number of neighborhood foreclosures affect the value, and use those reasons to justify your asking price.

    In the end, you might discover that the lender will not work directly with the owner to do a short sale, and you've wasted a lot of valuable time. Verifying in writing that the lender will work on a short sale without an agent or lawyer is your first step, because odds are they will not. However, you might find that one quirky lender who will agree.

    At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.