Buying a Short Sale Home
Arizona Residential Real Estate Group
"Great Realtors Selling Great Homes"
Hegreness Residential Team
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Buy a Short Sale
If you are considering the purchase of a Short Sale you need to know
what a short sale is and the process of purchasing a short sale. As a
Buyer you may have incorrect assumptions about short sales, such as
getting a great home at a huge discounted price very quickly.
You’ll also need to be familiar with the timeline to short sale approval. Note the time-line which can cause many buyers to decide a short sale is not for them.
1. Submit the offer to seller’s agent.
2. The lender orders a Broker Price Opinion (BPO) or appraisal in 30 to 60 days.
3. The lender reviews the offer and short sale submission package in 30 to 60 days.
4. A negotiator may be assigned in 30 to 60 days.
5. A level II negotiator may be assigned in 30 to 90 days.
6. The offer is approved or rejected hopefully within 60 to 120 days.
Reasons it can take so long to close a short sale:
1. The listing agent is not experienced with the process.
2. The negotiator is not keeping the process moving.
3. The bank does not have enough staff.
4. The lender lost the file.
5. The listing agent did not submit the proper paperwork for a short sale.
6. The appraisal is higher than the buyer’s offer.
7. A thousand other reasons!
Why purchase a short sale?
Often a short sale seems like a good deal to many buyers. The media has created a perception that cheap homes and bargains exist on the market for anybody to take advantage of and that a “Short Sale” = “Great Deal”.
If you want to see a home that is on the market simply because the price seems like a bargain, check to see if the property is a short sale.
On the surface, a short-sale may appear like a good deal. However, they are not for every buyer. A buyer with kids, dogs and living in a temporary housing situation, may not be right for a short sale because of the extended time needed for most short sales. However, if you have time, there are great prices available.
Many true bargains in the real estate market go to cash investors, however if you have time and are remain patient through the process there can be a good deal out there.
Why shouldn’t someone buy a short sale?
If you are interested in a short sale, make sure you review all possible risks to making an offer and purchasing this type of home. It’s likely you are not prepared for all these risks.
Time. Few short sales close in 30 days or less. Inform your buyer of the potential time-frame involved with a short sale and determine if they have the time, patience and ability to wait for the lender to make the decision to accept or reject the discounted payoff. Remind your buyer he or she could be under contract for a long period of time and that the buyer will be bound by that contract so they may need to keep the loan updated. Depending on when the Notice of Default was filed, and the lender's back-log of foreclosures, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take even longer to satisfy the demands of the second lender.
No guarantee the lender will accept the home as a short sale. The contract is usually contingent upon the agreement of the seller’s mortgage lender to accept the net proceeds of the sale as full payment for the underlying debt. This can be a long process, which can delay an anticipated settlement date, and buyers and agents should be prepared for this possibility. Ideally, the lender pre-approved the short sale prior to advertising on the Multiple Listing Service, but the fact that the property is a short sale should be disclosed in the comments section of the listing. The sales contract should also include a third party addendum, outlining that the contract is contingent upon the agreement of the seller’s mortgagee to accept the net proceeds of the sale as full payment of the underlying outstanding debt.
The seller does not even qualify for a short sale. Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
Probably no repairs or repair credits. Buyers will 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. Lenders typically will refuse to pay for repairs disclosed on a home inspection.
Sort Sales aren’t always a bargain. Lenders aren't unaware of the value of a home. Lenders will insist on a comparative market analysis, or broker price opinion (BPO). If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.
Lenders will likely reject low offers. Lenders want to minimize their losses as much as possible. If a buyer makes a low offer, chances are that it will be rejected. Or the lender could make a counteroffer, which will lengthen the process.
Lenders can change conditions. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract.
Lenders discount commissions. Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. In some cases it is the buyer who ends up paying for part of the Realtor's commission increasing the out of pocket cost by 1-2% to get the deal to close.
Higher buyer closing costs. Because lenders rarely pay for any extras, like a seller would be willing to do, the buyer may have to pay those extras. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes.
Loss of control of the transaction. If the buyer needs to close escrow by a specific date, don't count on it. A short sale closing takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender.
Low seller motivation. Some sellers may not be motivated to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.
All of these disadvantages can seem daunting in addition to the fact that buying a home is already a stressful process. Be sure you are ready to work through and know all the risks.
Short Sale Check List for Buyers
You may be good candidate for a short-sale purchase if:
You are very patient. When there is only one mortgage, 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 the financing is set. We can Refer you to someone great.
You have NO contingencies. Lenders like no-contingency offers and flexible closing terms. If you have to sell a home or some other event must happen before you can close, you will have a tough time getting a lender to accept your offer. We can talk to you about this.
You have a qualified real estate professional. We can suggest one :)
You have a title officer do a search on the short sale property to see all the liens attached to the property. If there are lien holders it's harder to close. We can assist you with this.
Additional Advice for Short Sale Buyers
If you are aware of the risks of short sales and qualify as a good candidate, here is some additional advice:
Be prepared for out of pocket expenses that may be necessary to bring the home up to livable standards.
Talk to your lender about the different loans available and try to avoid any high risk loan programs.
If you are paying cash, you will need to show proof of funds.
You need to think about resale before they make a purchase.
You should have an exit strategy to avoid economic hardship.
Get an inspection. It is extremely important that as a Buyer you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections.
In the end a short sale can be a very viable option for buying a home, just make sure the process aligns with your timeline and needs.
You’ll also need to be familiar with the timeline to short sale approval. Note the time-line which can cause many buyers to decide a short sale is not for them.
1. Submit the offer to seller’s agent.
2. The lender orders a Broker Price Opinion (BPO) or appraisal in 30 to 60 days.
3. The lender reviews the offer and short sale submission package in 30 to 60 days.
4. A negotiator may be assigned in 30 to 60 days.
5. A level II negotiator may be assigned in 30 to 90 days.
6. The offer is approved or rejected hopefully within 60 to 120 days.
Reasons it can take so long to close a short sale:
1. The listing agent is not experienced with the process.
2. The negotiator is not keeping the process moving.
3. The bank does not have enough staff.
4. The lender lost the file.
5. The listing agent did not submit the proper paperwork for a short sale.
6. The appraisal is higher than the buyer’s offer.
7. A thousand other reasons!
Why purchase a short sale?
Often a short sale seems like a good deal to many buyers. The media has created a perception that cheap homes and bargains exist on the market for anybody to take advantage of and that a “Short Sale” = “Great Deal”.
If you want to see a home that is on the market simply because the price seems like a bargain, check to see if the property is a short sale.
On the surface, a short-sale may appear like a good deal. However, they are not for every buyer. A buyer with kids, dogs and living in a temporary housing situation, may not be right for a short sale because of the extended time needed for most short sales. However, if you have time, there are great prices available.
Many true bargains in the real estate market go to cash investors, however if you have time and are remain patient through the process there can be a good deal out there.
Why shouldn’t someone buy a short sale?
If you are interested in a short sale, make sure you review all possible risks to making an offer and purchasing this type of home. It’s likely you are not prepared for all these risks.
Time. Few short sales close in 30 days or less. Inform your buyer of the potential time-frame involved with a short sale and determine if they have the time, patience and ability to wait for the lender to make the decision to accept or reject the discounted payoff. Remind your buyer he or she could be under contract for a long period of time and that the buyer will be bound by that contract so they may need to keep the loan updated. Depending on when the Notice of Default was filed, and the lender's back-log of foreclosures, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take even longer to satisfy the demands of the second lender.
No guarantee the lender will accept the home as a short sale. The contract is usually contingent upon the agreement of the seller’s mortgage lender to accept the net proceeds of the sale as full payment for the underlying debt. This can be a long process, which can delay an anticipated settlement date, and buyers and agents should be prepared for this possibility. Ideally, the lender pre-approved the short sale prior to advertising on the Multiple Listing Service, but the fact that the property is a short sale should be disclosed in the comments section of the listing. The sales contract should also include a third party addendum, outlining that the contract is contingent upon the agreement of the seller’s mortgagee to accept the net proceeds of the sale as full payment of the underlying outstanding debt.
The seller does not even qualify for a short sale. Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
Probably no repairs or repair credits. Buyers will 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. Lenders typically will refuse to pay for repairs disclosed on a home inspection.
Sort Sales aren’t always a bargain. Lenders aren't unaware of the value of a home. Lenders will insist on a comparative market analysis, or broker price opinion (BPO). If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.
Lenders will likely reject low offers. Lenders want to minimize their losses as much as possible. If a buyer makes a low offer, chances are that it will be rejected. Or the lender could make a counteroffer, which will lengthen the process.
Lenders can change conditions. Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract.
Lenders discount commissions. Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. The rest may want a discount. In some cases it is the buyer who ends up paying for part of the Realtor's commission increasing the out of pocket cost by 1-2% to get the deal to close.
Higher buyer closing costs. Because lenders rarely pay for any extras, like a seller would be willing to do, the buyer may have to pay those extras. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes.
Loss of control of the transaction. If the buyer needs to close escrow by a specific date, don't count on it. A short sale closing takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender.
Low seller motivation. Some sellers may not be motivated to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.
All of these disadvantages can seem daunting in addition to the fact that buying a home is already a stressful process. Be sure you are ready to work through and know all the risks.
Short Sale Check List for Buyers
You may be good candidate for a short-sale purchase if:
You are very patient. When there is only one mortgage, 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 the financing is set. We can Refer you to someone great.
You have NO contingencies. Lenders like no-contingency offers and flexible closing terms. If you have to sell a home or some other event must happen before you can close, you will have a tough time getting a lender to accept your offer. We can talk to you about this.
You have a qualified real estate professional. We can suggest one :)
You have a title officer do a search on the short sale property to see all the liens attached to the property. If there are lien holders it's harder to close. We can assist you with this.
Additional Advice for Short Sale Buyers
If you are aware of the risks of short sales and qualify as a good candidate, here is some additional advice:
Be prepared for out of pocket expenses that may be necessary to bring the home up to livable standards.
Talk to your lender about the different loans available and try to avoid any high risk loan programs.
If you are paying cash, you will need to show proof of funds.
You need to think about resale before they make a purchase.
You should have an exit strategy to avoid economic hardship.
Get an inspection. It is extremely important that as a Buyer you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections.
In the end a short sale can be a very viable option for buying a home, just make sure the process aligns with your timeline and needs.