Short Sales Don't Have to Be Scary

This post from William Tierney, an agent in our Scituate, Massachusetts office, discusses 5 major items buyers need to be aware of before purchasing a short sale.  With these tips in mind, the short sale process can be alot less scary.  While short sales can be attractive for a variety of reasons, price, being one of them, there are a few hurdles to overcome along the way.  That doesn’t mean you shouldn’t go forward with your purchase, however!  Just make sure you are thoroughly informed prior to going ahead in the process.  Will’s tips below will be a huge step in that direction. For more buyer and seller tips, please check out Will’s blog.

When purchasing a property that is a Short Sale there are some steps in the process that a buyer should be aware of prior to starting the purchase process.  The most important thing to know is, “What is a Short Sale?”  In simple terms, a short sale is a real estate transaction where the property is being sold for less than what is owed on the property via mortgage.  Generally the sale is subject to the approval of the mortgage holder (the seller’s lender).  This third party approval is necessary because the seller is attempting to sell the property for less than what the seller owe’s on the property.  And this seller will need this approval from their lender so that the lender will release the lien the lender holds on the property.  This needs to happen so that the buyer can receive clear title to the property.

Do Not Low Ball Your Offer

While I agree with the conventional wisdom that a buyer can get very good pricing on a short sale home, that does not mean the home can be purchased for pennies on the dollar.  I have noted that short sales often offer attractive pricing because of the perception that a short sale transaction can be excessively time consuming.  There are many in my trade who will steer a buyer away from a short sale,  simply because of the time factor.  While it is true that buying a short sale property will take some additional time to complete, generally speaking it only adds several more weeks to the process if the the listing agent is an experienced short sale agent. I will cover the time factor in more detail below but, suffice it to say that a Short Sale transaction will take some additional time to close.

Do not think that due to the additional time required to complete a short sale transaction,  buyers will be driven away and you’ll be able to make an offer for pennies on the dollar.  As an experienced short sale listing agent, I do factor in the impact the short sale has on the size of the buyer market, and adjust the pricing the property accordingly.   However there is another factor that has to be figured into the process that will not allow a low ball offer to progress in the short sale process.  This is the seller’s lender’s opinion of price.  When an offer is submitted to a lender, the lender will order an appraisal, or a BPO (a Broker’s Price Opinion).  The seller’s lender will only approve a short sale if the offer made is within the ballpark of the BPO.  So if you offer on a short sale is a low ball offer, well below the low end of the market for a short sale property, the seller’s lender will not approve the short sale.  In the end you will only have accomplished wasting your valuable time, the seller’s time, the lender’s time, and the buyer’s agent who should have given you better guidance on pricing.

Do you Home Inspection Early

Some inexperienced real estate agents will attempt to save their buyer money by having the buyer complete the home inspection after the short sale has been approved.    This is poor counsel.  It is wise to do your home inspection early.  The seller’s lender is primarily interested in exiting a bad situation for them.  In this case, the bad situation for them is the non-preforming loan on the home that is attempting to complete a short sale.  The seller’s lender is very interested in knowing that if the short sale is approved, that it will close.  The seller’s lender will be less likely to approve a short sale, if it is still contingent upon a home inspection.  Further, why would a buyer invest the time and effort to get a short sale approved, only to find out the home they have waited out a short sale approval from the seller’s lender has larger issues than they had anticipated?  As well the seller should not accept an offer to complete a short sale that is contingient upon an inspection that will be completed only after the short sale has been approved.  The seller could run the risk of losing the time needed to find the next buyer who will accept the home “as is”.  It makes no sense for any of the parties in the short sale process to wait to complete the short sale process.

Agree to Wait 90 Days for Short Sale Approval

It can take far less than 90 days to complete a short sale if a complete file of the necessary documents is on hand from the beginning of the process.  However, both the buyer and seller should be prepared to wait up to 90 days for the lender to approve a short sale.  There is a lot to the process of buying a short sale property that the lender needs to complete, in order for them to approve a short sale.  The lender needs to look at the seller’s financial situation, and determine that that there is a financial hardship.  The lender needs to have a BPO, or third party appraisal, completed on the property in question.  This valuation needs to come in within the ballpark of the offer.   The seller’s lender needs to determine the total amount of the loss to the holder, or holders, of the mortgage on the property.  And the holder(s) of the note need to approve the agreement to settle for less than what is owed on the property.  All of this can be a quick process if all goes well, but it can, and often does, take up to 90 days to complete.  So, if you are considering buying a short sale property, any and all offers should be prepared to wait at least 90 days for the short sale to be approved.  Any request by the buyer for less time is really unrealistic and simply wastes the seller’s precious time.

Nominal Amounts in Escrow Don’t Fly

Okay, so we now know when buying a short sale property one needs to have a market level offer on the property attempting a short sale.  We also now know to be prepared to wait 90 days for short sale approval, and to get the home inspection out of the way early in the process.  Next we need to talk about how much money needs to be placed in escrow.  This is an area where money talks.  A seller should not accept an offer on a short sale where the buyer is looking to tie up the property and take it off the market for up to 90 days without any recourse.  And the seller’s lender will almost always look at the amount in escrow as  a way to verify how committed, and financially qualified, the buyer is in purchasing the property.  Please don’t think that you can expect a seller to take his/her property off the market while you have nothing of substance to lose in the process.  The custom here in my market is to make an offer with $1,000 down.  And when the Purchase and Sale Agreement is signed, the total amount of escrow is typically at least five percent.  If you are not willing to do do this for the duration of the process, don’t think the seller will take you seriously.  The amount in escrow is  looked at by the seller’s lender and can impact the short sale decision.  If you are committed to buying a short sale property from a  mental point of view, you will also have to commit with your wallet as well.

Sign The Purchase and Sale Agreement

Most lenders will not consider a short sale unless they have a signed purchase and sale agreement with funds in escrow.  As noted above, the funds in escrow do need to be more than pocket change.  In many cases, the seller’s lender will require a signed purchase and sale agreement prior to their starting the short sale process.  So much of what is noted above needs to happen first.  Get the home inspection out of the way.  Be sure to have a healthy and meaningful amount of funds in escrow.  And then know it could take up to 90 days for the short sale to get approved.  And this 90 day clock only starts ticking upon receipt of the purchase and sale agreement to the seller’s lender.  Ask yourself, if you were the seller’s lender, why would you approve a short sale without a contract in hand?  Without a contract in hand, the seller’s lender is only bidding against themselves.  Hence my lenders require a purchase and sale agreement in hand prior to staring the short sale process.

Be sure to choose a qualified REALTOR

When selling your home or condo and you think you may be faced with a short sale make sure you choose to work with a good Realtor, who has some working knowledge of short sale procedures! Buying short sale property can be a complicated transaction and hiring a Realtor that knows what they are doing is critical. Remember as a seller you are not that far away from a potential foreclosure so picking the wrong Realtor could be a costly mistake.  Much of the same can be said for the buyer of short sale property, experience can be the determining factor in the process.

Though there is much more to the process, these are five things that are necessary to be able to commit to when buying a short sale property.

Have you ever gone through a short sale process?

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