Finding Short Sale Listings in MLS
Find a short sale and know what to expect when you do
Every Multiple Listing Service (MLS) system is different, so short sale listings aren't always evident...unless you know what to look for. You have some other options besides MLS as well if you're looking for these homes. When you do find a listing, taking certain steps can help ensure that the process moves forward as seamlessly as possible.
What Is a Short Sale?
Short sales tend to occur when property values drop, or when inflated appraisals were obtained to purchase the home. The property is worth less than its outstanding mortgage balance as a result.
The lender must approve the short sale when the seller enters into a purchase contract to sell for an amount that's less than the home's present mortgage balance. The lender is taking a loss to allow a payoff for less than the amount owed.
A short sale can also occur if there's simply not enough money to pay all the costs of the sale as well as the mortgage. It's possible to sell a home for more than the mortgage, yet the sale will still be short because there isn't enough money from the proceeds to pay all the costs the seller must bear to sell.
Short sales aren't always bargains for a buyer. Such a sale doesn't always mean that the buyer is purchasing the property under market, and it can take a long time to close...if it closes at all. Not all lenders will approve every short sale, and a short sale price that's advertised might not be the real price it will cost to acquire the property. It's an educated guess about what it will probably take to sell the home.
Finding Short Sale Listings
Most short sales are listed by real estate agents. You'll find these listings on local websites and in MLS feeds to various sites. First look where the term "short sale" appears if you have access to search terms. It might show up under "status modifier" or the term might be contained in the marketing comments. Choose that field as your search term.
Agents generally slip in words that identify the listing as a short sale, including:
- Subject to bank approval
- Notice of default
- Give the bank time to respond
- Preapproved by a bank
- Headed for auction
- Third party review required
The "third party" designation sometimes means that the seller has not yet submitted the required documentation to his lender to be approved for a short sale. Ideally, he has and this means the approval process is in progress.
Read the listing carefully. You might be looking at a "contingent short sale," which would mean that the home isn't for sale or that only a backup offer will be considered.
You can also check courthouse filings for pre-foreclosures. The lender must file a foreclosure complaint in many states to get the process started, so a public record would exist of this event. Lenders won't even consider a short sale unless the seller is seriously in arrears with her mortgage, and foreclosure proceedings have most likely been started if she's that far behind with her payments.
Such a seller might not even have contemplated a short sale yet, but she might be willing to talk with you or your agent and explore the possibility.
Good, old-fashioned newspaper ads often list short sales. Craigslist.com does as well.
What Lenders Require From Short Sale Sellers
Lenders typically want to know that there is no option for the seller other than a short sale or foreclosure, and they want proof.
- They invariably require a hardship letter from the seller. What went wrong so he can't meet his mortgage obligation? What has he done to try to remedy the situation? Is the problem likely to resolve at any time in the foreseeable future? The more dire and long term the circumstances, the more likely it becomes that a lender will approve a short sale.
- Lenders require proof of the circumstances set forth in the letter, including bank statements and tax returns going back at least two years.
- They'll want full documentation of all assets owned by a seller, as well as other debts he owes.
- They'll want a comparative market analysis to nail down the fair market value of the property. No buyer is likely to be willing to pay more than this, so it can factor heavily in the decision.
- They'll want a full list of any and all other liens that exist against the property.
Some Tips for Short Sale Buyers
Properties with a wide gap between fair market value and the outstanding mortgage balance are often your best bet. They're likely short sale candidates because a foreclosure sale is not likely going to be for enough to cover the mortgage. And why would a lender insist on proceeding with the time and expense of a foreclosure only to potentially suffer a greater loss?
Your offer should closely align with the home's fair market value. And the more earnest money you can put down, the better.
Above all, hire an agent who is well versed in handling short sales and who can advise you of the procedures, including local customs in your area. The more experience an agent has with short sales, the more likely it becomes that the price will be reasonable and acceptable to a lender.
The right agent can touch base with the seller's agent before the process moves too far along to determine the status of the short sale. You might want to move on and look elsewhere if the process has stalled, such as because the seller hasn't yet submitted a full short sale package to the lender.
You'll also want to know if there are numerous liens against the property. This doesn't necessarily mean a second mortgage. Tax liens, child support liens, and liens placed by other creditors can all pile on. Every one of these lienholders must agree to the short sale because they're typically in line for payment after the first mortgage lender. It's unlikely that these other creditors will receive any money from the short sale at all if the mortgage lender isn't receiving full payment.
Ask a lawyer for advice and guidance if you have legal questions.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.