Categorized | Short Sales

10 Steps to Buying a Short Sale

Posted on 15 June 2009 by Carl Martens

1. Identify potential short-sales

Locate preforeclosures in your area.  You can do this by searching courthouse listings, legal ads, or contacting a local Realtor that is an expert in that community.  Determine how much money is owed on the house and compare that number to the approximate value.  You should focus on homes where the owner has little equity in the home and pass on those where the owner has substantial equity.  If the owner has equity in the home the lender may rather foreclose and then resell the home closer to market price.

2. View the property

More often than not homeowners of short sale homes often neglect to do basic upkeep and repairs to the property because they are unable to do so.  Therefore, it is very important that you view the condition of the property and figure out a rough estimate of how much it’s going to take to repair or renovate the home.  When buying a short sale, you aren’t just buying a home you are buying someone else’s problem, yet that doesn’t mean it isn’t fixable!

3. Do your research

What do homes similar in the same neighborhood sell for?  You make your money on the buying side, not the selling side of a home sale.  Be sure to determine the potential profit before making any offer.

4. Find all liens and mortgages

Ask the seller or the listing agent what liens are on the property, and which lender is the primary lien holder.

5. Figure out the financing

This is critical. You have to know how you’re going to pay for the property. If you’re a good credit risk, the existing lender may be willing to give you a loan. Since they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. It’s important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage.

6. Contact the lender

You or your agent should speak with the loss mitigation department (or perhaps the resource recovery department) rather than the collection or customer service department, which is only interested in recouping past due loan payments. Finding the decision maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign (notarization is usually required) an authorization letter, which gives the lender permission to discuss the mortgage situation with you.

7. Complete the lender’s short sale application, if they have one

Many lenders have an application specifically for a short sale request.

8. Assemble the proposal

The proposal generally consists of a package of materials including the application and authorization letter plus:

  • The purchase and sale contract — signed by you and the seller — to buy the property for a specified price. The lender is not going to entertain tentative offers. You’re not going to get the chance to ask the bank, “Would you take X number of dollars?” In most cases this also means posting a sizable amount of money to demonstrate your desire and ability to go through with the transaction if it is accepted. If you can’t make a sizable down payment, the lender would have no reason to believe you can do any better than the last owner. It’s also very important to the buyer that the contract be contingent upon all lenders approving the short sale in writing.
  • A hardship letter. It’s important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments — usually 90 days. The lender must be convinced taking a smaller loss now is better than a bigger loss later. To make that case, start with a letter written by the seller giving an overview of the seller’s desperate situation. The lender must recognize the seller’s inability to pay the loan — immediately and in the foreseeable future — and that the situation is irreversible. The seller should supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shutoff notices, car repossession paperwork, last two years tax returns, recent pay stubs and recent bank statements. If the lender thinks the seller has money or assets stashed away, it will never go along with a short sale.
  • A statement of the property’s value. This can be an appraisal or a broker’s price opinion. The lower the estimate of the property’s current market value, the better it will be for you. You want to show the lender that the seller would not be able to get enough for the home via a normal sale to satisfy the loan. Compile a list of all the negatives and problems of the home that negatively affect the value and make it undesirable to the average buyer and tougher for the lender to resell. The longer a lender must hold onto a property, the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale. Geller, who has participated in hundreds of short sales, says this part is critical. “Many short sales are turned down because the lender doesn’t think the offer is high enough.” He advises doing this before the lender does a valuation. “There are ethical and legitimate ways to get a low valuation and if you show this to the lender to start with your offer won’t look so low.” Geller adds the offer to the lender can be below the amount of valuation. “The offer can be 85 percent in areas that are slow but not terribly distressed and as low as 50 percent in really distressed areas.”
  • Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands. If you can convince the lender the home is a money pit, all the better. Take photos of any damages and get estimates of the repair costs. Note: This is also a good opportunity for you to take an honest look at the property, and decide if you are willing and able to invest the time and money required to fix it up. Remember: A short sale is always an as-is sale. The lender is not going to pay for or otherwise be responsible for any repairs. But, for example, if the lender forecloses, there’s a good chance it will be forced to make repairs just to get the house resold. That’s one of the liabilities the lender may face.
  • A settlement statement. This statement (which can be prepared by a closing agent or real estate lawyer) outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often referred to as a net sheet and the information can be entered onto a HUD-1 Settlement Statement to show the final, negative result at closing.

9. Negotiate

It’s not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don’t be afraid to walk away if the lender won’t meet your figure.

10. Seal the deal

Once you’ve reached an agreement that all three parties (you, the seller and the lender) are OK with, get everything in writing and officially recorded. Make sure the seller understands all of the terms of the deal. Next comes the closing and the property is yours.
More important details

  1. The entire process gets far more complicated and uncertain of success if there is more than one lender involved. Second or junior lenders often are the ones absorbing most of the loss. If there is a second mortgage or a home equity line of credit, you’ll need approval from all. In addition, you may find your mortgage loan was sold to another entity in a process called “securitization,” and therefore you also need approval from that company.

    Be sure to do a title search, and verify the lien position of the lender you plan to contact. Only pursue short sales with the primary lien holder. Making a deal with a junior lien holder is a waste of time, as you will still be on the hook to the primary lien holder for whatever is owed to them.

  2. The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big tax break by changing the way the forgiven amount was viewed for tax purposes. Prior to passage of the act, that amount was considered as income for the borrower and was subject to tax. However, the new law removed that tax liability.
  3. Time is of the essence. While you negotiate with the lender, the clock keeps ticking. Do everything you can to get the lender to move quickly. Many short sales fall apart because the lender moves too slowly and fails to complete the deal before the property goes to auction.
  4. Some buyers have successfully negotiated with the lender to minimize the damage to the seller’s credit rating. The lender has no obligation to agree to this, but if you can convince them not to report this action as a black mark on the seller’s record (and put this in writing as part of the deal), it will give the seller a big head start in rebuilding their financial lives. Typically, the loan will show up on a credit report as “paid,” but it will carry a notation that says something like “settled for less than originally owed.” That is more favorable than a foreclosure, but still negative.

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