Okay, so this is my very first blog post, so please be kind. I've be trying to figure out what to use for my first post and with all of the chatter about short sales in the market right now, I think I found a good topic to start with.
Lets start with the first question that most people have, "What is a Short Sale?" A short is essentially just what it sounds like, the seller is "short" of what they owe their lienholder in the "sale" of their property.
Why would a homeowner want to do a short sale on their property and secondly, why would a lender want to accept less than what is owed?
Short sales are not for everyone. And contrary to popular belief, just because you owe more than what you could sell your property for under current market conditions and want to sell does not mean that a short sale would be a reasonable answer. In order for a lender to consider a short sale, the homeowner must have been faced with some sort of hardship or mitigating factors. Instances which might qualify as a hardship are divorce, illness, death of a spouse or child, job loss, or in some instances a mortgage in which the interest rate is scheduled to adjust up. Basically, the ability of the homeowner to continue to make regular monthly mortgage payments is no longer feasible. From the homeowner's point of view the short sale is not as devastating as a foreclosure with regard to both their credit report and emotional health. From the lenders point of view the short sale alleviates the time and money for legal fees, the foreclosure process, and eviction, in addition to possible damage to the property from a distressed homeowner. Often times, the loss realized from the short sale could be much less than any profit realized after these factors. You should, of course, consult with your attorney to determine if a short sales makes sense for your situation.
Why would a buyer want to buy a property listed as a short sale and what is the process?
In many instances a buyer could catch a bargain or gain instant equity in purchasing a property that is listed as a short sale, but they must make sure to do their homework first. If you are not familiar with market values in the area of the property you are looking to purchase the short sale, have your Realtor provide you with a "buyers CMA (Market Analysis)" to determine if you are making a good investment decision. You should also consider how long you are looking to keep the property and if you are going to occupy the property or use it for investment. If you are looking for a quick close on your purchase, then a short sale is definitely not for you. The amount of time it takes to close or even the amount of time it takes to find out if your offer has been accepted or rejected by the bank can vary significantly. It is not unusual to wait 90 days or longer for a response from the seller's lender. It is also important to know that your short sale will almost always be an "as - is" purchase, since the lienholder will be reluctant to negotiate once they have issued an approval. If they are willing to do so, you could be back to square one waiting another 90 plus days. The general rule of thumb is that if you have plenty of time to work with and are looking to get a bargain then a short sale might work for you.
What other things should I be aware of regarding purchasing a short sale property and what will increase my chances of having the offer accpeted?
There have been instances in which some lenders have accepted short sale purchase contracts on a property in shorter periods of time. I personally had one lender approve and close a sale in less than 30 days. This, however, is not the norm. It is also important that the listing agent or sellers attorney has provided the all of the requested documents to the lienholder for them to process the short sale. Each lienholder has a different procedure and time frame which they follow. Generally, the lienholder will request all of the following before making a determination: the executed purchase contract, the listing agreement, market time and property price history report, hardship letter, last two months bank statements, last two check stubs, and last two years tax returns. Once these documents have been received the lienholder assigns the short sale to a "negotiator" who will evaluate the package and at this point often orders an appraisal or BPO (broker price opinion) of the property. Having a properly prepared and organized short sale package sent to the lienholder increases the chances of success. It is also important to note that in most instances a property that has had a significant drop in price below market value without incremental price reductions over an extend time on the market, may very likely be rejected by the lender.
If I am buying a short sale property, when should I apply for my loan and can I still have a home inspection?
When purchasing a property listed as a short sale, a buyer should be aware that once the short sale has been approved the lienholder will want to close relatively quickly. I recommend that buyers formally complete their loan application and have their mortgage company completely approve them subject only to title and appraisal. It is not a good idea to allow your mortgage company to order your appraisal in advance of the approval from the sellers lienholder, or you might be stuck paying for an appraisal on a property you cannot buy. A home inspection is always recommended, even when you are purchasing a property as-is. The home inspection could reveal major structural defects, making your bargain purchase not such a bargain. It is well worth the few hundred bucks for the home inspection, when you are going to be investing several thousand dollars.
Whether you are a Realtor, Buyer or Seller you should educate and familiarize yourself with the short sale process. With all of the changes in the economy and housing market, "short sales" will be a predominant part of the real estate market for quite some time to come.
Colleen Basinski - Managing Broker, McColly Real Estate, Tinley Park, IL