What is a short-sale? A short-sale occurs when a homeowner realizes they won’t be able to afford their mortgage payments but still wants to salvage their credit by avoiding foreclosure. If you sell your house through a short-sale, with proper credit repair you should be able to purchase another home in 2 – 3 years. If you allow the home to go into foreclosure, your next purchase may be up to 7 years away.
A short-sale occurs AFTER an owner goes into default on their payments and BEFORE the house goes up for auction. If the owner can find a buyer, the lender may allow the sale and forgive a portion of the debt if it makes financial sense for them to do so. The lender stands to lose a great deal of money if they have to foreclose, so a short-sale is usually in both the lender’s and the homeowner’s best interests.
Approaching a short-sale as a buyer can be somewhat tenuous. There are many pitfalls in the process, and you could be waiting anywhere between one and six months before you’re even in Escrow. When buying a short-sale, it’s important to understand the most common problems buyers face and how these problems can be minimized or averted altogether.
To understand the problems associated with a short-sale, first you need to have a basic understanding of the process. Once a seller begins to miss payments on their loan, they may list their home with a REALTOR as a short-sale. This doesn’t mean that the lender has agreed to the sale. Before the lender will even consider the short-sale, they first must be presented with a valid offer. Because they need an offer to even start the process with the lender, listing agents will typically price short-sales 5 – 10% below market value to generate a great deal of interest and to quickly entice multiple offers. Once an offer is in hand the listing agent will send the offer, an estimated closing statement, and the short-sale package (which has to clearly demonstrate the seller’s inability to make their payments) to the lender for review. From there, the lender will assign a negotiator to handle the transaction. The negotiator will then order an appraisal for the property and help the institutions involved (first lien-holders, second lien-holders, mortgage insurers) come to an acceptable pay-off agreement. At this point, the lender will choose to either accept the offer as-is, or counter with their bottom line figure. In other words, as a buyer, you don’t know what price you’re getting for the house for at least a month (and often longer).
Now that you understand the short-sale process, here are some tricks you can use to make buying a short-sale a lot easier:
1. Make sure there is only one lender. Also, try to avoid a short-sale that involves a mortgage insurance company. The more financial institutions involved in the negotiations, the longer the process will take and the higher the price you’ll eventually pay. The listing agent should be able to tell your REALTOR how many lenders have an interest in the property, and they might even be able to tell you if their client had mortgage insurance as well.
2. Hire a professional short-sale negotiator. If the listing agent doesn’t have a short-sale negotiator that they regularly use, have your agent write it into the contract. Professional negotiators maximize your odds of completing the sale in a reasonable time for a reasonable price. They negotiate short-sales for a living, and they’re not working on behalf of the lender.
3. Make sure the listing agent agrees to submit your offer and put all others in backup position. Until the bank approves the short-sale nothing is official. If a better offer comes in after yours, the listing agent may choose whether or not to submit that offer to the lender. If you’re going to write an offer on a short-sale, get the listing agent’s word that your offer will be the only one submitted to the lender and that all others will be held by the listing agent in back-up position. The last thing you want is to be in a drawn out bidding war that could last months.
4. Keep the offer simple. Don’t complicate your offer by asking for XY and Z. You know the seller doesn’t have the financial means to pay for anything, and the simpler you make your offer the easier it will be for the lender to break it down financially. Volunteer to take care of the termite clearance yourself. Don’t ask for repairs. If you want a Home Warranty, pay for it yourself. If you’re asking for a closing cost credit, make it a dollar amount instead of a percentage. The easier your offer is to understand, the quicker the lender will respond.
5. Finally, stay patient. Short-sales take a long time and it’s easy to get restless. As long as you’ve followed rules 1 through 4, you should have about an 80% chance of completing the sale (yes, that’s very high for a short-sale). If you’re satisfied with the house, satisfied with the price, and you’re guaranteed to be the only offer, you’re sitting pretty. Ride it out and hope for the best.
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