It’s a buyer’s market in real estate. As a follow up to our article on How To Buy A Foreclosure, we discuss how short sale real estate purchases work.
Buying A House In A Short Sale: Our Story
Last fall, my spouse and I, with the help of our real estate agent, stumbled across a little gem of a home in the village of my hometown. We weren’t looking for anything specific, but the agent told us that she had a place she thought we should see. Unsure of what to expect, we fell in love with the property upon walking through the front door. The next morning, we met the agent at her office and wrote the offer.
This wasn’t our first rodeo. We bought and sold three other homes prior to this one. This particular purchase, however, proved to have a new set of challenges. The seller was facing the possibility of foreclosure, and the house was classified as a “short sale,” meaning that the offer price was less than what the seller owed on his mortgage and would have to be approved by the bank (in these cases, the difference owed by the seller is usually forgiven). Since the bank wasn’t eager to be a homeowner, they were quick to approve the purchase and requested closing within 30 days. We ended up closing a little later than this but it was a relatively smooth process for us.
While our purchase of a short sale home wasn’t too challenging, a little bit of web research reveals that this is not often the case. In many areas of the country hard hit by the subprime mortgage crisis, lenders are overwhelmed with requests for “short sales” by desperate homeowners and buyers eager to snap up bargain homes. In these areas, it frequently takes as long as 90 days just to find out whether the bank will accept the purchase offer. However, despite these delays, a patient buyer can find a great new home in a short sale.
How To Buy A Short Sale Property
So, how does a buyer go about finding the perfect short sale? This lengthy article from Bankrate.com lists how to go about buying a short sale in 10 steps. Allow me to give you a summary of the points:
- Identify your short sales list. There are many ways to do this, but I advocate using an experienced real estate agent to help absorb some of the headaches of the process (i.e. most of the following steps) that you will otherwise have to handle yourself. Even if you choose to approach a transaction without the assistance of an agent, be sure to have a good real estate attorney in your corner.
- Check out the short sale properties. If the home is in need of work, try to get an idea of what it is going to cost to complete that work to help you determine whether the house is really a bargain.
- Shop around, compare and do the research. Your real estate agent can easily compare the home you’re looking at to comparable homes that have sold in the area recently, in order to determine the property’s true market value.
- Know what type of financing to get. Make sure you’re able to qualify for a mortgage loan. If your offer is accepted, you may be required by the seller’s lender to close quickly. Pre-approval for financing is recommended. Here are a few tips to get the best home loan rates.
- Uncover the mortgages and liens on the property. It will be easier to put together a reasonable offer if you have a fairly accurate idea of what is owed on the property. Ask the seller or the seller’s agent for this information. It may seem rude to ask, but it is in their best interest to disclose the information. Also understand that most lenders will not entertain the idea of a short sale until the seller is at least 90 days delinquent on their mortgage.
- Work with the lender. You or your agent should speak with someone in a position to make a decision about your offer. You will likely need a notarized letter from the seller giving the lender authorization to disclose information to you.
- Complete the application for the short sale, if need be. Some lenders have developed a specific application for just this purpose. The one my spouse and I dealt with did not.
- Assemble the proposal, to include:
- The purchase and sale contract, signed by both the buyer and seller.
- A hardship letter from the seller detailing their financial woes. Supporting documentation should be included, if applicable.
- An appraisal or other statement of the property’s value.
- A statement of costs and liabilities detailing damage and needed repairs to the property. Short sales are always completed on an “as is” basis, and the buyer will be responsible for any repairs after they have taken possession.
- A settlement statement.
- Negotiate. This is standard procedure in any real estate transaction 😉 .
- Finalize the deal. Dot the i’s, cross the t’s, shake the hands, and grab the keys. Don’t forget to stop at Lowe’s and pick up a new welcome mat.
Buying a short sale home can be an enormous hassle with fantastic rewards. Just be sure to choose your home carefully, know what you’re getting into, and unless you’re a real estate expert, find an agent who is experienced in short sales to guide you through the process. That’s what we did!
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 28 comments… read them below or add one }
I’d recommend a quick trip the County Record Office to check for liens on the property before investing too much effort. Many of the short sales that I have been involved with had numerous liens against the property (in one case over 100!) People that have had difficulty with their mortgages are more likely to have had other credit problems. Creditors often slap a lien on the property. So be aware of this!
I’m glad to hear you were able to complete a purchase in a short sale. Not only do these provide lower prices for the buyer, they also are better for the seller (than foreclosure). So it’s (sort of ) a win-win situation, in the sense that the seller will not have to go through the lengthy and damaging process of foreclosure. Props to you!
It’s good that the post mentions that short sales don’t usually go this smoothly! My spies in the real estate business are saying they prefer not to deal with short sales because of the complications and time involved–90 days as the post reports seems to be more typical.
In a normal transaction (non-short sale) there are three primary parties of interest–the sellers, the buyers and the buyers lender. In a short sale, there are four–the buyers, the buyers lender, the sellers and the sellers lender. But in the short sale, the seller walks away with nothing, and the sellers lender will take a loss. Determining how big that loss will be is the complication.
I was under the impression that banks were reluctant to close a short sale deal because it meant they were losing money – the sale price is less than the previous owner borrowed from them. But since you were successful I guess there are exceptions! Thanks for sharing your success story – it gives me hope that others will be able to do the same!
hi. in my opinion,
First: Contact the lender. Explore a mortgage restructuring or forebearance.
Second: Clearly, your first home is overpriced if it’s been on the market for a year. Interview (via phone, if necessary) 3-5 real estate agents in the area of your first home. Get their evaluations, and a CMA (competitive market analysis) of the property. Find out which ones have experience with short sales.
Third: I’m not sure what a real estate attorney would do. Feel free to contact one, but I’ve never encountered one who handles short sales.
Fourth: Do a complete financial analysis. You raise the possibility of selling the second home. That might make sense.
Good luck.
In a real estate man’s eye, the most expensive part of the city is where he has a house to sell
Lots of time will be saved if we had access to the deed documents and other legal documents from the county clerk’s office website. I sometimes search through clark county’s assessor website to check if there are any liens on the property. Moreover, I think the above summarized points can be very well used as a checklist for short sale properties as well as other general sales. I am sure you would have spent a good time in summarizing this from the long bankrate.com article. Thanks for your time.
Regards,
Mack
If the home is in need of work, try to get an idea of what it is going to cost to complete that work to help you determine whether the house is really a bargain.
It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.
you forgot to mention hire a good realtor to help you find the homes, do the paperwork, work with the bank, hire the appraiser, etc!
@Sam,
You are absolutely right. But #3 does mention and assume the presence of a real estate agent in this equation. The steps outline the process and does assume the help of a professional. Thanks for pointing this out! The sale of any real estate typically requires the use of knowledgeable professionals to help with finding property, appraising it and getting the paperwork in order.
I am a realtor in Roanoke Virginia. I currently have 5 short sales pending and 2 more to sell. The key to this is to have a realtor that is experienced in short sales and a bank that is willing to work with them. Several of the banks are super tough to get to work with you.
I like to use agents, as I have found that you get to know them and they understand you and the ones that are good show you the houses they think you might be interested in. I also think that when they know that another agent is helping you they give me a better service. I have bought buy to let investment properties for a while now and having a good agent that understands me has helped me avoid looking at some really bad places.
My friend is into short sales and then he sells them right away. The key is that he has an investment group available to lend on the sale to the new owner with a note that is created in the manner that the investment group likes. Any “flippers” here?
Ed: Sorry, I don’t allow direct transactions through this site. We don’t broker connections here.
There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings.
this is a great real estate article. once i have enough money I’m looking to get into the market.
I notice over and over again that posts about short sales consistently say that one should hire an agent experienced in short sales, but they say nothing about how to determine this experience or what amount of experience is the least an agent should have. Another issue is that there are many agents that have experience with short sales, representing buyers, that would be unable to get a short sale done on their own on the listing side.
So, I will give some minimums and ways to qualify an agent.
1. First, these types of transactions can be a little more tricky than average so I would not employ an agent in this regard with less than 1 year of full time experience.
2. Require proof from the agent that they have at least closed 3 short sale transactions.
3. It is best to deal with an agent who has closed at least one short sale as a listing agent. This makes sure they have an idea of what needs to take place to make the transaction happen.
4. Whatever you do, do not use the listing agent as your agent. This is not a good move on your part. It puts you in a disadvantage in the negotiations of the transaction.
Short Sales can be a lengthy process. You make some great points above, Check title with a fine tooth comb. Yes, try and work with the bank/lender.
I would not avoid a purchase of a short sale, just because it’s a short sale. In fact, I help buyers through the process; the key is to know the process and set realistic goals. It’s not a quick and easy process at all, it can wear you out, but it’s worth it if you know how to navigate through it.
Gosh, isn’t real estate a tricky area? Great article and I would certainly take notice of the above points. (i like the “short sales can be a lengthy process” as it made me smile).
In some cases, even with an experienced real estate agent, it can still take months just to get a response from the seller’s lender, and up to six months to close the deal. It all depends on who the seller’s lender is. I’ve seen over and over again lenders not approving a short sale for a certain price, then foreclosing on the property and selling it for a significantly lower price a year later (my guess is there is no communication between the foreclosure and loss mitigation department).
There is also nothing wrong with using a specialty Real Estate agent to help follow on the guide above and some of the things that can’t be included in10 bullet list. There are Certified Distressed Property Experts and I believe the other designation specializing in short sales is SFR? anyways, for the novice looking to get a short sale it can be frustrating, time consuming, and heartbreaking but NOT impossible. As a matter of fact I suggest to my customers to allow me to consider short sales in their search because those that succeed in getting theirs are happy (as long as the as-is condition is palatable).
As a real estate broker I see hundreds (if not thousands) of short sales in my market. I decided to do a short study of my own on how many short sales actually turn into a purchase. It was not a particular surprise to discover that less than 15% of short sales actually convert to purchases. Most go into foreclosure. And I also discovered that short sales aren’t particularly great deals. Many people wait and wait for a response from the lender to their low-ball offer only to discover that it is rejected and they have to pay a much higher price. My advice is to stick to foreclosures. They’re easy to purchase and they truly are very good deals.
When doing a short sale it is important to remember in addition to negotiating a discount with the bank, in order to have an even greater profit you must negotiate with the motivated seller in terms of price to gain more equity for yourself.
Just yesterday our local paper here in Colorado had the headline “Short Sales Gum Up The Market”. It explained how purchasing or selling a short sale home has become a difficult task. The system is entirely backed up, as 12% of home sales nationally at this point are short sales. It can take months to get an answer if you get one at all. Even an experienced real estate attorney who wanted to purchase a short sale home had a tough time. Short sales are a new phenomenon, and banks and lending companies just don’t have the trained staff to deal with today’s backlog. In addition, banks seem to have a hard time eating the losses, even though they will have to face all the costs associated with foreclosure later. One agent’s advice in the article is to not fall in love with the short sale home you want to buy, and on top of that expect to wait at least 6 months for the thing to close, if you get that far in the process. If you manage to do this, however, the deal can be excellent for the buyer and can keep the seller from going into foreclosure.
Although short sales have been on the rise, the only problems are the banks now. They have become very greedy and are not willing to help out people these days. The banks would much rather take the home back and dump it at an auction then dealing with the home owner to reduce their payment and principal. It’s sad that we gave them all that money and this is how we are treated.
My wife and I are in the process of attempting to buy a short sale that Bank of America holds the mortgage to. We have been going back and forth since May. Sometimes you get no answer for weeks. Sometimes no answer at all. I hear that Bank of America is the worst to do business with. They seem to be proving that through this process. We agreed four weeks ago to their terms. Now we can’t get a signed contract from their end to go secure our loan. The agreement to allow the short sale was given in May of this year. Just over a month ago the bank wanted to have sent to them all of the paperwork that they had already seen and approved for this to be a short sale. No wonder our financial institutions are in such a mess. They can’t get out of their own way.
Great info, thanks for the post. Buying a short sale is a tricky game sometimes, and people need to understand that it takes time to get a good deal in real estate. People need to understand that it can take weeks to get an answer back but that is the name of the game with short sales.