As a buyer watching the real estate market, you are undoubtedly aware that there are more "short sale" properties on the market, at least in many areas. A short sale is a home where the market value of the property is LESS than the loan amount owed to one or more lenders. And buyers often believe that these are the best deals, along with foreclosures.
Note that there may be state or regional differences in the requirements and paperwork - ask your agent.
Don't be scared off by these short sale properties as they may turn out to be a great deal for you.
But you need to know a few things before you decide IF you want to pursue a short sale purchase:
- A seller must disclose if the home either IS a short sale or likely will be due to the market value.
- A short sale MUST be approved by the lender. Even though a seller might accept your offer, it will be subject to approval by the lender
- Lender will (likely) send out an appraiser to evaluate the property in light of recent sales - they are looking for market value, too, and you cannot expect a short sale to be a fire sale (i.e., it may NOT be a great deal after all)
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Lender must receive hardship letter and other required documents from the seller in order to approve a short sale - Lender will likely have a checklist of requirements and paperwork required for the short sale process
- Lender will likely request that the sale be "as is" and due to hardship will probably not approve any credit for repairs
- Be prepared for a short sale to take more time (total time may be 60 days +/-) - this is one of the biggest complaints from buyers
If you are making an offer:
- Make sure you make the offer contingent on the short sale being approved by the lender and set a time frame for approval
- An addendum form (statutory in California) is advised to outline the short sale contingency terms and conditions (this is a optional state form here, but there may be other requirements elsewhere in California and in other states)
- A letter to the seller is also advised requesting written confirmation that the lender has received the hardship letter and other documents as part of the short sale application
- There is a good chance there will be more than 1 offer
- It is still prudent (I would say it is ESSENTIAL) to conduct a home inspection even though the lender will probably require an "as is" sale - you still want to know what you are buying and what repairs need to be made
- It is possible the seller will not be able to do any Section 1 repairs resulting from the Wood Destroying Pest Inspection (e.g., termites) due to hardship of funds. This may vary from state to state AND lender to lender
Be sure to discuss issues and questions with your agent before proceeding, preferably someone who has some experience with short sales.
I would NOT recommend taking on a short sale purchase without representation by a qualified, knowledgeable licensed agent. There is too much at risk for you, the buyer. And remember, the listing agent represents the seller's interests, not those of the buyer.
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UPDATE - November 21, 2007
Here is a link to some other articles I have written that answer other common questions asked by buyers about short sales. While the articles reference Carlsbad homes, the general issues are probably applicable in most areas depending on current practices and any particular laws.
UPDATE - APRIL 2008
As you will see in the comments, short sales continue to be very common, complex, and frustrating. And very time consuming, sometimes taking months before a response from the bank occurs.
I recently was in a short sale situation where after 5 weeks the bank had not assigned a negotiator yet, even though all the paperwork (including buyer offers) was submitted and in their computer. The issue, per the bank, is being overwhelmed with the volume of short sale properties.
It seems that REO (bank owned properties) are easier, at least in this area, to deal with since the bank owns the property. Neogiations on offers seems to be much faster, although it is hard to know how it will happen, i.e., will the bank look at all offers, the highest, in order of receipt, etc. And negotiations may only be verbal (even though we have a form for counter offers here in CA).
I have heard from more than one agent that getting a home to closing can take 3 to 6 months from start to finish. That mean a heckuva lot of patience on the part of buyers and agents.
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