Many U.S. real estate markets are flooded with short sales and, according to the National Association of Realtors, that number is only expected to increase in the near future. So if you’re in the market for a new home, there’s a good possibility that you’ll fall in love with a home that’s listed as a short sale.
If you’re considering bidding on a short sale, here’s some basic information you should know.
WHAT IS A SHORT SALE?
A short sale is a real estate transaction where the owner’s lender or lenders agree to accept a purchase offer of a new buyer, short of what is owed by the original owner.
For example, if a homeowner has a loan of $175,000 but the property is only worth $100,000, the lender may be willing to accept $100,000 from a new buyer. Because participating in a short sale rather than foreclosing on the home saves lenders money, some banks have even created streamline processes to make short sales faster and easier.
THE SHORT SALE PROCESS
In a short sale, the seller’s agent lists the property for sale and collects the seller’s “hardship package” including bank statements, loan information, and a hardship letter explaining why he or she had to do a short sale. Then, when you as a buyer put an offer in to buy a short sale, the agent submits that offer, along with the hardship package to the lenders and the negotiation process starts.
One of the biggest challenges is getting multiple lenders to participate in the short sale. Even though junior lien holders would get wiped out if the home were to be foreclosed on, they often require monetary contributions to release the lien. This can also lengthen the negotiation process.
HOW LONG DO SHORT SALES TAKE TO BUY?
You’ve probably heard horror stories of buyers waiting six months or more to find out if their offer on a short sale is accepted, and then getting a counter-offer at a price much higher than they can afford to pay. While a rare handful of lenders can accept short sale offers within a month or two, acceptance can typically take four to six months, or even longer.
And when there are junior lien holders, each one will typically have their own Broker’s Price Opinion (BPO) done at the property before they accept the offer. When viewing properties, find out if the short sales have been “approved” or not. Approved short sales are those where the lender has already agreed to take a specific price. Short sales that have not yet been approved take the longest. Good communication from your agent can make this anxious time period go by faster. Don’t forget that just because you have an offer pending on a short sale, does not mean that you have to stop looking at homes.
HOW TO GET A GOOD DEAL ON A SHORT SALE
Is it possible to save money by buying a short sale? Absolutely—yet not every short sale is automatically a deal. Make sure that your agent provides you with recent comparables (statistics of active, pending and most importantly recently sold homes in the area with similar characteristics). Just because the seller isn’t getting any money out of the sale of the house doesn’t mean they will automatically accept your offer.
Keep in mind bidding wars can happen before the listing agent submits the highest and best offer to the lender. How do you ensure that your offer will get accepted over others?
There’s no one winning formula, and it’s not always about the highest price. For example, the financing and terms are also important. “Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment”, according to an article in Realty Times.
An important point to consider is that with some short sale transactions, the junior lien holders may require the buyer to come in with extra cash to release the liens.
So, when the listing agent markets a property at $200,000 based on comparables, the lender in 1st position may accept a purchase price of $205,000, but the lender in 2nd position may require an additional $6,000 to release the lien. Every transaction is different, luckily. Buying a short sale where the owner only had one loan is generally going to save you time and money, but in certain markets, those are far and few between.
“As Is” Condition
Finally, if you’re going to purchase a short sale, don’t expect any repairs to be done for you. Lenders typically won’t pay to repair anything such as cracked slabs, broken windows, or leaky roofs. Though they may pay for termite fumigation when necessary, they will not pay for any cosmetic repairs or concessions. So don’t put an offer in on a short sale that clearly needs work if you don’t have the skills to do the work yourself or the money to hire someone to do it right.
HOW TO BID ON A SHORT SALE
If you are comfortable with the prospect of buying a short sale, first: get mortgage pre-approval. When you do, ask your lender if a.) they will finance a short sale and b.) what additional requirements there are, if any.
One financing has been assured, go ahead and submit an offer with your agent. Be sure to read all the paperwork that you submit and as well as all the lender’s terms and conditions that you get back. If you have questions about any of the paperwork, ask your agent or lender. Do not sign anything that you don’t understand!
Once your offer is in, be prepared to wait and wait and wait. With any luck, you’ll have an acceptance from the lender or lenders just before you start to forget that you made the offer in the first place!
Have you purchased or put an offer on a short sale? How did it work out? Share your story in a comment.