Buyers pursue short sales to get a good deal. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump, ask your agent to find out if the home is a short sale.
Why? Because you need to be an informed buyer to ensure you are armed with a qualified professional before making an offer on a pre-foreclosure, short sale home. It is not as simple as you may believe and very few can close in 30 days or less.
Many of my buyers of short sale properties have waited 4- to 6-months to close on a short sale, sometimes longer.
What Is a Short Sale: A short sale means the seller’s lender is accepting 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.
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 have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
Due Diligence: Your agent needs to perform due diligence before helping you make an offer to purchase. Your agent can find out who is on title and whether a foreclosure notice has been filed. This is important because it will help you to determine how much to offer.
If there are multiple 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.
Experienced Short Sale Buyer's Agent: It is one strike against you if the listing agent has never handled a short sale. It’s even worse if your own agent has no experience in that arena. You need an experienced short sale agent.
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 has followed up in a timely manner.
Qualifying the Property and Seller for a Short Sale: A lender in 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 the debt that is forgiven.
Submitting Your Offer: Once the seller has accepted your offer it is then sent to the lender for their approval. The process of forwarding the documentation to the lender is easy. Waiting for their response is hard. If you have not prepared yourself for a long, arduous wait, you will be disappointed. Lenders have several internal processes to perform when an offer is received, as well as obtaining multiple in- and out-of-house approvals. The wait time after the lender has received your offer and the necessary backup documentation can be upward of 4 months! If they approve your offer, it is then that escrow opens. A traditional escrow period can range from 30- to 45-days depending upon a variety of factors. Patience is the name of the game. Communication is key and critical between your agent and you.
In addition to submitting the offer, the lender will want to see that you are preapproved for a home loan. (Loan “pre-qualification” is insufficient—you must be preapproved.) Traditionally, additional paperwork that accompanies your offer include:
- proof of funds for the down payment or for the cash purchase price,
- loan pre-approval letter,
- copy of your earnest money deposit check (not deposited with escrow until your offer is lender approved),
- a HUD1 (your agent will assist with obtaining this document from escrow), and
- other documents that substantiate the purchase.
Allow the Lender Time to Respond: You offer will be contingent upon the lender’s acceptance. Your agent will help you determine a reasonable time frame for their response. You will have multiple contingencies which will allow you to be free to cancel your offer if you so desire.
Right to Conduct Inspections: Generally, the lender will not pay for customary items that a seller would pay. Some of these items include the home protection plan for the buyer, buyer credits of any kind, pest inspections/repairs, and home repairs. A buyer will be asked to purchase the property in its present “as is” condition, which means no repairs.
It is extremely important that a buyer obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections. Do not waive your right to obtain these inspections, and make your offer contingent upon approving them. Maintaining your right to perform inspections does not mean you are obligated to perform them; instead, it means, at your expense, you have the right to have them performed. I wholly recommend your having the homeinspected so you know what you are buying--buyer beware. You’re right to inspections start when escrow opens.
