Learn About Short Sales

I have been asked a lot lately buy numerous buyers and friends as to what exactly a short sale is. Everyone tells me that they keep hearing the term, but they are not familiar with what it is. I personally have gone through the short sale process and have a better insight now from doing so.

What is a Short Sale?

Homeowners in financial distress often consider various options, including a short sale, prior to foreclosure. Their goal is to negotiate future financial liabilities and preserve their credit. In New Hampshire, the laws governing foreclosures provide incentives for lenders to work with homeowners that can no longer afford their homes. The foreclosure process takes time and money and may prove to be more costly to the lender. Under the Home Affordable Alternatives Program (HAFA) offered in 2010 by the Treasury Department, lenders and homeowners have additional incentives to consider a short sale.

The first step to a successful short sale transaction requires the negotiation of an acceptable contract with the Seller subject to lender approval with no guarantees that your offer will be approved. If the contract is not acceptable to the lender then the Seller may not have sufficient time to sell to another party and avoid foreclosure. The following tips will increase your chances of negotiating a successful short sale transaction:

Are You a Qualified Buyer?

Providing creditable evidence that you qualify to purchase the property is absolutely necessary. The Seller is not likely to accept your offer without a valid credit approval as the lender will not grant approval.  Obtain a credit approval from a reputable lender or if a cash buyer provide proof of funds. The approval must not contain conditions such as selling an existing property.

Pre-Qualify the Listing

Sellers selling short typically have a time-line they must meet to avoid foreclosure.   If they have not communicated with their lender(s) and started the process, there may not be sufficient time to affect a sale.   As your Realtor, I can pre-qualify a listing on your behalf. Information I will obtain includes:

• Is the seller's short sale package prepared for submission to the lender?
• How many liens are on the property? If more than one, what are they? Is there a plan to satisfy all the lien-holders?

During my personal short sale buying experience, there happened to be two lien holders and they were not agreeing on settlement. This made it a more difficult transaction.  

If you pursue a property that is not "short sale ready" you may be restricted from buying other properties of interest.  Search to view all the listings available through the NH MLS in the towns of interest.

Negotiating the Offer

The first step is to have your offer accepted by the Seller and you will be competing against other contracts. Real estate agents often list the property at a low value to encourage multiple offers. Others price the property at the bottom of fair market value. Price, terms and your qualifications will be the deciding factors for Seller acceptance.  Sellers and lenders prefer "clean" contracts without contingencies.

• The Deposit - Sellers will not be likely to accept your offer with a low deposit. Buyers can easily "walk away" from a contract with low deposits. If you are serious about buying the property offer the Seller a strong deposit.
• Home Inspection - be prepared to invest the time and money in the home inspection prior to lender approval. A seller may not want to take the risk of conducting the inspection after lender approval. If they do, they risk losing the buyer on the inspection issues and will not have time to sell the property prior to foreclosure.
• Flexible Closing Date - Lenders often approve short sales with quick closings. You must be prepared to meet their conditions if you want to consummate the sale.
• Subsequent Offers -As a rule, real estate agents must present all offers.  A contract with better terms and conditions may have a better chance at being approved by the lender. The lender will give the homeowner direction as to submitting additional offers.   In addition, arrange for your lender to lock your interest rate for your mortgage so that you qualify whenever the closing is required.

Lender Approval

Lenders have no set formula for determining the value of the property other than to substantiate values through due diligence.  However, Freddie Mac (one of the largest secondary market lenders) has a value range of 88% of one or more broker price opinions (BPO).  Have realistic expectations of the approval process as it may take between 30-180 days and market conditions can change.  If the lender and the Seller are participating in the HAFA program, these timelines will be streamlined for a quicker response.

If you do decide to go through the short sale process, just make sure that you really want the house and that you will have the patience to wait the transaction out.