As seen in the April 10th, 2008 Edition of the Yucaipa News Mirror
Buying a Short Sale Property: Guide to Success
Special to the News-Mirror by Randy Fox
In our last two articles, we've taken a look at the basics of what a short sale is and how to conduct a short sale. In this article, we'll look at how to buy a short sale property.
Whether you're a real estate investor or someone just looking to get a good deal on a home, mention the words "short sale" and people instantly think they can get a home at a bargain price. After all, about 70-percent of homes listed for sale in today's real estate market are short sales. Easy picking's to get a deal, right?
Making an offer on a pre-foreclosure, short sale home is not as simple as you might think; very few short sale properties can close in the standard 30-day escrow process. In fact, many short sale homes end up not selling and fall into foreclosure. So when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like Donald Trump finding the next great deal, do your homework and ask your real estate agent if the home is a short sale.
What is a Short Sale?
For those who have missed my past articles, a "short sale" means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.
The seller will need to be in default, to have stopped making mortgage payments and prove hardship before a lender will consider a short sale. Also, the seller might have over-encumbered, owing more on the home than what it's worth, so a discounted price might bring the price in line with market value, not below it.
In today's market; home prices are going through an "adjustment period" and selling prices are a reflection of real-time/fair market values. Keeping that in mind will do you a world of good as you go through the home-buying process.
Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer. Keep in mind that the list price may not be reflection of the price the lender is asking for; the list price may be set at a level to induce offers.
If there are two loans, you could have a problem. The first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.
Hire an Agent with Short Sale Experience
Its one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an agent who's experienced with short sales.
As short sales can take weeks and even months, it is of the utmost importance that your agent follows up with the listing agent on a daily basis. Since the agent on the buyer's side can have no contact with the lender (s) who hold the note on the short sale property, it all comes down to how aggressive the listing agent of the property is; staying at the forefront of the lender is an absolute must in order for a successful short sale transaction to transpire.
Prepare the Seller for Lender Demands
A lender is not going to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender and sellers may also owe taxes on the amount of debt that is forgiven.
Submit Documentation & Purchase Offer to Lender
Keep in mind that the seller has no say in accepting or declining your offer; all offers are sent to the lender for approval and you do not have a deal until the lender accepts it. The lender may also decide to do nothing with your offer, as they are in no obligation to respond to it. Another thing the lender may do is to hold on to your offer to wait and see if other offers come in; this can lead to a bidding war and the selling price of the home could actually end up being higher that the amount the seller owes on the home.
In addition, the lender will want to see that you have your own loan available and that you are pre-approved by your finance company. Have your agent send a pre-approval letter to the lender along with the submission of your offer. Be prepared to submit a good faith deposit to show the lender you are serious with your intentions to purchase the home. It will also help if your agent sends a list of comparable sales in the area that support the price you are offering to pay for the home.
Give the Lender a Deadline
Have your agent make your offer contingent upon the lender's acceptance and give the lender a time frame in which to respond, after which you will be free to cancel. If the lender is under no pressure to make a decision, the paperwork will sit on a desk somewhere and you may never hear back from them.
Some lenders submit short sales to committee, but most can make a decision within two to three weeks. I had one instance where the lender took six weeks to render their decision, only to come back with an offer that was $60,000 more than what my client's had offered. Needless to say, my clients decided to look elsewhere.
Expect Commission Negotiations
Regardless of the commission the seller has agreed to pay, the lender is actually the entity paying the commission; the reason being the seller is not receiving any money with which to pay a commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property "as is," which means no repairs.
It is extremely important that you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections. Do not waive your right to obtain these inspections and make your offer contingent on approving them.
The most frustrating part of dealing with short sales will be the time frame it takes for the lender to respond to your offer. If you are in a hurry to buy a home, you should shy away from short sales and pursue another avenue to purchase a "bargain" home, such as REO's or bank-owned properties, homes that have already gone through the foreclosure process.
However, if you are an investor and/or are in no hurry to purchase a home, and you're willing to play the short sale game, you just may be able to get that oh-so-elusive good deal on a home in today's real estate market.
Randy Fox is a residential and commercial real estate agent with Century 21 Best Properties in Yucaipa. He can be reached by phone at (909) 965-2937 or email at firstname.lastname@example.org. He also has a website; www.yucaipaproperties.net