Are you looking to buy a new home? Are you thinking that now's a great time to find bargains? Before you make an offer, it pays to know a little about the seller's situation.
If a home is being sold for below what the current seller owes on the property-and the seller does not have other funds to make up the difference at closing-the sale is considered a short sale. Many more home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, and declining home values in a slower real estate market.
A short sale is different from a foreclosure, which is when the seller's lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.
You're a good candidate for a short-sale purchase if:
You're VERY Patient:
Even after you come to agreement with the seller to buy a short-sale property, the seller's lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.
Your Financing is in Order:
Lenders like cash offers. But even if you can't pay all cash for a short-sale property, it's important to show you are well qualified and your financing is set. If you're preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
You Don't Have Any Contingencies:
If you have a home to sell before you can close on the purchase of the short-sale property-or you need to be in your new home by a certain time-a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.
If you're serious about purchasing a short-sale property, it's important for you to have expert assistance. Here are some people you want to work with:
Experienced Real Estate Attorney.
Only about two out of five short sales are approved by lenders. But a good real estate attorney who's knowledgeable about the short-sale process will increase your chances getting an approved contract. Also, if you want any provisions or very specialized language written into the purchase contract, a real estate attorney is essential throughout the negotiation.
A Qualified Real Estate Professional ( Preferably an Exclusive Buyer's Agent)
You may have a close friend or relative in real estate, but if that person doesn't know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few practitioners and ask them how many buyers they've represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLSs permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as "lender approval required.")
It's a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic's lien, homeowners association lien, etc.), it's much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you've waited for months for lender approval. If you don't know a title officer, your real estate attorney or real estate professional should be able to recommend a few.
Some of the other risks faced by buyers of short-sale properties include:
Potential for Rejection.
Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you'll have wasted months. Or the lender could make a counteroffer, which will lengthen the process.
Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you've already negotiated, which may not be agreeable to you. No repairs or repair credits. You will most likely be asked to take the property "as is." Lenders are already taking a loss on the property and may not agree to requests for repair credits.
The short sale process follows pretty much the same procedure from bank to bank. Make sure your agent completely understands the process and can direct you through all the hurdles required to bring a property through closing. As of Jan 31st there are additional disclosures and requirements that have been inacted by the Federal Trade Commission. Depending on certain factors, the so-called MARS rules (Mortgage Assistance Relief Services) could require members to make certain disclosures to consumers if they negotiate a short sale with a lender or advertise their short sales experience.
The Basics of a Short Sale:
Banks grant short sales for 2 reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth.
The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but the basic procedure is similar from bank to bank. The seller's short sale package will most likely consist of:
·Letter of authorization, which lets your agent speak to the bank.
·HUD-1 or preliminary net sheet ( provided by listing agent or Seller's Attorney/Title Company)
·Completed financial statement
·Seller's hardship letter
·2 years of tax returns
·2 years of W-2s
·Recent payroll stubs
·Last 2 months of bank statements
•Comparative market analysis or list of recent comparable sale ( provided by listing agent)
Writing the Short Sale Offer and Submitting to the Bank:
Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales. Banks are not in the business of giving away a home at rock-bottom pricing. The bank will want to receive somewhat close to market value. The short sale price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers.
After the seller accepts the offer, the listing agent will send the following items to the bank:
·Executed purchase offer
·Buyer's preapproval letter and copy of earnest money check
•Seller's short sale package
If the package is incomplete, the short sale process will be delayed. In this event, the bank might even shred the package. The Buyer's agent should determine the status of the Short Sale Package before presenting an offer.
The Short Sale Process at the Bank:
Buyers may wait a very long time to get a response from the bank. It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process. A Buyer's Agent should ensure that the listing agent is conducting the necessary follow-up with the lender and provide meaningful and periodic feed back to the Buyer. If a Buyer must close on a home is a defined period of time, then a short sale property may not be for them. Buyers should continue to look at other properties that may meet their requirements. Once they make an offer on a different property and have a contract they MUST have their agent withdraw their short sale contract.
Following is a typical short sale process at the bank:
·Bank acknowledges receipt of the file. This can take 10 days to a month.
·A negotiator is assigned. This can take 30 to 60 days.
·A BPO is ordered. The bank probably will refuse to share the results of the BPO.
·A second negotiator may be assigned. This can take another 30 days.
·The file is sent for review or to the PSA. This can take 2 weeks to 30 days.
·The bank may then request that all parties sign an Arm's-Length Affidavit.
•The bank issues a short sale approval letter that defines the price and the date that price is good through. The buyer and seller must close on the property at those terms and before that date. A revised contract my be required and the due dilligence period begins.
Some short sales get approval in 6 to 8 weeks. Others take 90 to 120 days, on average. The clock starts once the short sale package is complete and all the required paperwork has been submitted to the bank and a file has been assigned to a negotitator.