Buying a short sale can be a good investment if you understand the process and know what to expect.
Work with a Knowledgeable Real Estate Agent
Because of the complex nature of short sales, it’s important that you don’t try to make this type of purchase on your own. Hire a real estate agent who has experience with foreclosures and short sales, especially if you are a first-time buyer. Ask questions and learn about the process before you take the next step. Make sure you understand the short sale and can make a knowledgeable decision about what is in your best interest.
How to Make a Solid Offer on a Short Sale Property
Buying a short sale home is similar to any other property when it comes to making an offer. When you see a home you like, you will want to submit an offer quickly to be considered before another offer is accepted. Because you must meet the bank’s approval as well as that of the seller, you must consider a few factors when deciding on what to include in your offer and what kind of price you are willing to pay.
The following power point presentation will give you some basic tips on submitting an offer on a short sale. Work with a real estate agent who understands the local market to get even more guidance and help you submit a strong offer.
How to Get Your Short Sale Offer Accepted
If you have decided to purchase a short sale property, you want to make your offer as strong as possible. Yours may not be the only being considered by the seller, so you must work to make sure they take it seriously. In a competitive market, you can do several things to ensure you stand out from the other offers.
- Complete all paperwork and include all paperwork. Have everything you need ready to present in a timely manner.
- Let the seller know you understand the lengthy process of approval and are willing to wait.
- Be pre-approved by a lender, showing you can qualify to purchase the property.
- Include a sizeable earnest deposit, which proves you are a serious buyer.
- Make your price reflective of the value of the property rather than trying to get a cheap deal.
- Get authorization from the seller to follow up on the offer when it makes it to the lender for review.
Even if a property hasn’t been approved for a short sale, you can begin the process of being pre-approved for a loan. You should also find an agent who can help you through the challenges of buying a short sale. Don’t wait until a short sale is announced on a home you want because these homes can go quickly and it takes time to find lenders and real estate agents with knowledge of the short sale and foreclosure market.
Dealing with Multiple Lenders and Sellers in a Short Sale
When you put in an offer on a short sale, you not only have to deal with the seller but the current mortgage lender as well. In some cases, you may have more than one lender to work with. One lender holds the primary mortgage while a second lender could hold an additional mortgage such as for a home equity loan or a line of credit.
All lenders must agree to the sale or it cannot happen. The secondary lender will want a share of the proceeds, but there may not be enough money to pay everyone. This is when the lenders and seller will have to negotiate. Investors, such as Freddie Mac and Fannie Mae also have to approve the sale before it can take place.
Each lender or investor will have a specific set of requirements. They will conduct a separate review of the offer, which is why it can take weeks to get everything settled and be under contract on a short sale property.
Sellers can slow down the process when they fail to submit documentation on time. The review by the lender cannot continue until everything is in place.
Sometimes a lender may require the seller to bring money to closing to reduce the amount of the loss on the property. If the seller fails to follow this guideline, the closing will be delayed or even stopped completely.
While you cannot prevent these issues from happening in a short sale, it pays to be prepared and know about them. When you decide to pursue the purchase of a short sale, you can do so with plenty of information and make the decision that is best for you.
Common Mistakes Buyers Make with a Short Sale
While a short sale can be a great decision, it can also leave you with regrets if you aren’t prepared. Here are some common mistakes buyers make when they are purchasing a short sale property.
When you tour a home that is being sold through a short sale, you don’t want to ignore any potential repair issues or problems you see in the house. Many times, these homes will show signs of neglect with mold, filth, leaks and even squatters if the home has been vacant.
Even though you know you will have to make any repairs you find, you still want to get a home inspection. Find out the worst of the house before you are stuck with it. Take the information from the inspection and determine costs of repairs before you decide to go through with the purchase.
Not Allowing Time for Closing
Closing isn’t going to go as smoothly and quickly for this type of home as for a traditional purchase. Expect it to take longer to get approval from the lender. Title searches and issues could also delay closing. Allow yourself plenty of time up front so you aren’t worried about where you will be living when the closing date is postponed.
Getting Emotionally Involved
Buyers have a tendency to get attached to a home they want to buy before it is theirs. While this isn’t a good idea in any purchase, it’s especially dangerous with a short sale. You want to make a rational decision about the right property and not let emotions cloud your judgment.
Have an objective friend look over your figures for the purchase price and renovation costs to make sure this property makes sense for you financially if you can’t stay neutral. Also, listen to your real estate agent who knows you, knows the market and isn’t emotionally involved in the home.
Be prepared and avoid these mistakes when you decide to pursue a short sale for your next home.
Technical Terms for Short Sales
You may hear a lot of different terms when you are looking at properties for a short sale. It’s critical that you know what they mean to ensure you stay on top of the process.
- Short sale – a home is being sold for less than what is owed
- Approved for short sale – the bank has reviewed the seller’s information and approved the request for a short sale
- Third-party review required – indicates the homeowner hasn’t been approved for a short sale or the approval is still pending
- Settlement statement – information the mortgage lender will review to determine approval for a short sale; it includes the buyer’s source of financing, payment to cover any taxes and liens, commissions for the agent, other expenses and the proposed date of closing
- Short sale package – this is the buyer’s offer, pre-approval letter, and escrow check that the lender must review to determine approval for the purchase
- Pre-foreclosure – means the same as short sale, the house is being sold before it is foreclosed upon
- As-is – this term means that the house is being sold in its current condition and no repairs will be made by the seller
Another term is the short sale addendum. You will want to read over this document carefully because it includes critical information about how the contract can be cancelled along with other specific terms. For instance, it will detail property inspections, the release of the earnest money, costs the buyer and the seller will have to pay and the time the buyer will wait on approval.
It’s important to note that the seller may cancel a contract on a short sale if they decide not to sell, if the home is foreclosed upon, if the seller gets a higher offer or if they file for bankruptcy.
If all of this information on short sales doesn’t scare you away from the potential benefits of such a property, find a real estate agent and begin your search for the right property.