Buying a Short Sale: What You Need to Know

Real Estate Broker/Owner with J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY License # 49FA1074963

I sold my first short sale in the 90's. I have over 10 in my pipeline. I am known in my marketplace for the specialty. Buyers are justifiably interested in the savings a short sale can offer. However, few buyers are prepared for the process, often because it is new terrain for their agent as well. Forewarned is forearmed. Here are some things that you should be prepared for if you have a short sale in your sights:

  1. You must be prepared to wait...and wait. Occasionally, we get some short sales where everything just clicks and the thing is done almost as quickly as a regular sale. Those are the exception and not the rule. Typically, and it all depends on the lender, short sales can take months. Here is part of what is going on behind the scenes: the lender's loss mitigation department is inundated with short sale applications. Often, the negotiators are rotated every 30 days. Faxes get lost. Responses take a long while, and the seller's negotiator (typically the agent or in New York, the lawyer's office) can be on hold for an hour waiting to speak with a human, only to hear that they were given the wrong fax number last week. It is a maddening, daily battle. Be glad you aren't in the front lines. Eventually, it gets sorted out.
  2. You are buying the house AS IS. Just like with a bank-owned foreclosure, it is "an as" is transaction, because no principal has the funds to remedy any physical issue with the house. Get an inspection for sure, but understand that unless it is an environmental problem, the lender won't address anything and the seller cannot financially.
  3. You WILL get clear title. In an approved short sale, none of the seller's back taxes, arrearage or other issues convey to you. The lender is hitting the reset button and releasing all liens. That may not mean that a non-conforming bathroom shed or finished basement is compliant, but financially the title is whole.
  4. No, you may not speak with the bank. Some buyers get frustrated with the process and figure that all they need to do is speak to someone and fix the short sale. They cannot. The lender will speak ONLY with the borrower or an authorized party about the mortgage being worked out for the same rules of confidentiality that prevent your bank from talking with anyone about your finances. Even if you were to get hold of a loss mitigator, your input will be as welcome as if you walk into a stranger's operating room or onto a construction site.
  5. You probably can't "steal" the house. As a matter of fact, your offer may not even be submitted unless it is your best offer. Once the seller's hardship package is approved, the bank will order a BPO (broker price opinion) or appraisal to ensure that the sale price is in line with market conditions. You might get a $400,000 house for $365,000, but you won't get it for $250,000. Short sales are good deals, but they are seldom steals. Which brings us to this point:
  6. The lender may counter your offer.  The house may appraise considerably higher than your offer, or your offer may indeed be too unrealistic. If the bank counters you, look on the bright side: the finish line is in sight! If the counter isn't to your liking, the smart move is to counter back. If you simply walk away, you may have nailed the seller's coffin, who has, in good faith, been working and waiting just like you have been. Negotiate. If the seller chose your offer to submit to the lender over the others, you should operate in the same good faith and negotiate. The lender may still come down some.
  7. Once approved, you have a deadline to close. The biggest irony in real estate is how glacially slow lenders are in approving short sales and how impatient they are to close once they rubber stamp one. Typically, it is only 15-30 days to close or the offer is rescinded. Therefore, you should have your act together with regard to your appraisal, rate lock, inspections, and so forth. When that approval come down the pike, you need to be prepared to pull the trigger.

My view is that if the short sale process were easier and more streamlined, the market would stabilize far faster, doing the economy a world of good (are you reading this, Mr. Obama?). Unfortunately, the process we work with now is often bloody difficult more often than not, with lots of moving parts and a shifting landscape. Understanding that going in can lessen your frustration and minimize the confusion of a process that is anything but simple. Few worthwhile things are.

Comments (12)

Melina Tomson
Tomson Burnham, llc Licensed in the State of Oregon - Salem, OR
Principal Broker/Owner, M.S.

I think #4 is my biggest pet peeve.  Can I call the listing agent....Can I call the bank...

There is a certain temperament required for short sale purchases and not all buyers have it.

Feb 11, 2009 04:36 AM
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

As a buyer's agent for a short sale, here is what you need to do to make sure that your clients get the home cheap and the foreclosing lender only sees your offer:

1. Find a short sale that hasn't had an offer submitted to the bank first.

2. Make your offer 10%-30% (depending on your area and price of homes) below the lowest comps you can find . Have the seller (lender) pay for everything.

3. Tell the owner of the house that your client wants to purchase personal property, such as a pair of shoes for 1k (or whatever) if they end up buying the house. Tell the listing agent that your client will gaurantee a 6% commission should the lender knock down the commissions. Have the owner and listing agent only submit your offer. 

4. Either you or the listing agent must intercept the bank's appraiser/BPO and give them 3 sold comps and 3 active comps that will justify your purchase price.

5. Wait for the bank's response. Now both the listing agent and owner are motivated to work with you.


Feb 11, 2009 04:41 AM
Mark MacKenzie
Phoenix, AZ

That about sums it up as well as you could.

Personally, I have tried to paint a very realistic picture to my clients about short sales.  They can be very misleading if the listing agent doesn't know what they are doing.

Bank owned homes on the other hand, while imperfect, give buyers a better sense of reality in terms of pricing and timing.

Feb 11, 2009 05:07 AM
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY

If I did an 8th bullet point, it would be a tie between

  • There cannot be a seller concession


  • If the listing agent is clueless or inexperienced in short sales, move on.
Feb 11, 2009 05:11 AM
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Actually I get seller concessions on my short sales (up to 3% of purchase price). Very rarely do they get challenged. The only thing that get's kicked off 95% of the time is home warranty and termite repairs.


Feb 11, 2009 09:48 AM
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY


I have never seen a seller concession on  a short sale. If the buyer is going to borrow that much the bank will want it.

Feb 11, 2009 09:56 AM
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Try it on your next short sale. If you want, I can e-mail approval letters showing up to 3% in seller concessions. For example, if the purchase offer is 500k, then ask for 15k in closing cost. Some lenders want a break down (buyer side of the HUD-1) as to how the money is spent. Some lenders don't care. And so far, some Countrywide short sales (depending on who the investor is) is only allowing seller concessions if the buyer is getting an FHA loan.

I do admit, I do call them "Buyer's closing cost" instead of "seller's concessions" on the HUD-1. Very rarely do they get shot down. In the rare cases that they do, I use it as a negotiating tactic to lower the price.

Feb 11, 2009 10:27 AM
Vanessa V. Simmons
Real Living HER - Columbus, OH

Regarding seller concessions if the loan is conventional I usually can get seller concessions sometimes even home warranty.  If FHA the pre-foreclosure is on an FHA loan no concessions.


Feb 11, 2009 03:12 PM
Charles Gardner-Realtor/Investor
ZIP Realty, Inc-Houston District - Humble, TX

Excellent information.  Thanks for the post and the wisdom

Feb 11, 2009 03:45 PM
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

No doubt that short sales can be a real challenge.  Thanks for the info.

Feb 13, 2009 12:08 AM
Eileen Hsu
Douglas Elliman Real Estate - Manhattan, NY

Your first point on "You must be prepared to wait...and wait." is very similar to buying into New York city Co-Ops. The Co-Op board takes about 3 months or longer to review everything about the perspective buyer, the financial documents, tax returns, reference letters, stock, money market paper...etc, buyer has no control over the time or if they will be approve or not. After the long document reviewing process, then they may grant an mandatory interview.  Short sale is quite similar to buying into a Co-Op in New York city in the timeframe and uncertainty aspect.

Feb 14, 2009 11:38 AM
Maya Thomas, Broker
Tampa, FL
Please see my client recommendations.

REALLY great post.  Every BA asks me "Do you think you can get THIS one closed in 30 days?"  Uggh.  I try to get the patience thing in to the Buyer's Agents brain so they can let the buyer know.  I think that the BA's are what makes the buyer's walk since they don't explain how long it could take from the beginning.  What ever happened to "Under promise and over deliver?"  

Feb 25, 2009 05:19 AM