Short sale - Do NOT buy one! Short sale process explained quickly - 2017
How to Buy a Short Sale Property
Similar to buying a foreclosure property, the purchase of a short sale property can offer significant cost savings, as well as the potential for headache. A short sale property is a home facing foreclosure, but the lender has not yet taken ownership of it. A short sale allows the homeowners to sell the property for less than they owe on the home loan rather than going into foreclosure, which is more damaging to a credit report. As a prospective short sale buyer, you will need to know how to identify a property, investigate its value, and make your offer and complete the purchase.
Finding a Short Sale Property
Consult a real estate agent.Real estate agents have access to files that list properties that are available through short sales. They may also be able to provide you with properties that are being sold through foreclosure or bankruptcy as well. If you notify the real estate agent that you are particularly interested in a short sale property, the agent can help focus your search.
- You may want to ask the real estate agent about his or her experience in representing buyers on short sale properties. The short sale process does include some special considerations, so an experienced real estate agent will be helpful.
Search online databases for short sale properties.You can conduct your own search for short sale properties in your area. There are several online real estate databases that allow you to search for properties by selecting various specifications.
- For example, Zillow.com allows you to select a location, property type, and price range. On the Zillow search page, select “More,” and then enter “Short Sale” in the box for keywords for your search.
- MLS.com is the website for the Multiple Listing Service, which is used extensively by real estate agents. You can search on this site for properties by location, type and price range. You can also limit your search to “Foreclosed” properties. If you select this option, it will identify each property as either “Foreclosed” or “Pre-Foreclosure.” Your search will also provide a map that identifies each property as a foreclosure, pre-foreclosure, or short sale.
Refine your search.When you begin, you may find dozens or even hundreds of properties that match your search criteria. Think about the properties that are truly the most important to you, and use those to refine your search. By using a few limiting search terms, you can narrow your search to a few properties that are likely to be a batter fir for you.
- For example, running a general search on MLS.com for foreclosed properties in the Boston, Massachusetts, area results in 182 properties. However, limiting the search then to only "Pre-Foreclosure" and "Single Family Homes" reduces the list to only 15.
- On some sites, you can also use a sorting feature to prioritize your results. On MLS.com, when you get a list of properties, you can click on the title of each column to sort the properties according to that feature. For example, clicking on the heading "Bed" will sort the properties in ascending order based on the number of bedrooms. You can sort by any of the headings, Status, Address, City, Zip Code, Bed, Bath, Square Feet, Property Type, or Price.
Sign up for automatic notices of foreclosure properties.Some real estate websites will allow you to set up an account to receive automatic email notices of new properties that become available. Choosing this option will help you learn of properties early, which will increase your chances of having an offer get accepted.
- For example, on MLS.com, you can set a preference to be notified of Foreclosures, Pre-Foreclosures, Bankruptcies, Short Sales, Deals, or Tax Liens. You can select one or more of these settings.
Researching the Property
Look for properties listed as “Approved for Short Sale.” If a property is listed as “Approved for Short Sale,” then the mortgage lender has already approved the owner for a short sale. The lender has already decided to accept a reduced price for the property. Finding a property with this listing may simplify your offer and acceptance process.
Understand the listing “Third-Party Review Required.” A property that is listed with the label “Third-Party Review Required” has not yet been approved for short sale by the lender. As a result, you cannot act with certainty on the listing price. When you make an offer, the buyer will need to relay that offer to the mortgage lender and get approval before your sale can go through. If you are interested in a property with this listing, you need to be prepared for a lengthier process.
Investigate the liens on the property.For a short sale to occur, all lien holders must approve of the sale. If the owner of the property only has a single mortgage, then this may be a relatively simple process. However, if the owner has taken out one or more additional mortgages, all parties must approve. Knowing the number of lien holders can help you understand how the process will work.
- You can conduct a search at the local registry of deeds to find out about the liens on a property. You can search by the property address. All liens must be recorded.
- Identifying the lien holders does not give you all the information you will need about the amounts of the liens. However, you will have a better understanding of the entities that will be part of the decision-making process.
- As an example, suppose you are interested in a property with an approximate value of 5,000. You find out from public records that the owner has two mortgages, one for 0,000 and a second for ,000. If you make an offer on the property of only 0,000, the first mortgage holder would approve the sale, but the second would get nothing, and is not likely to approve. You must offer enough to provide the second mortgage holder with some recovery on its loan.
Investigate the property’s value.Either by using an online real estate database, or by working with your real estate broker, you will want to understand the value of the property before you make an offer. You can find the sale prices of comparable properties in the same area. Then make adjustments based on your property’s size, age, additions or other elements.
Submitting Your Offer
Submit your offer as early as possible.Owners and lenders both have an incentive to complete the sale as soon as possible. Owners generally just want to be done with the property and move on with their lives. Lenders are losing money on their loan until they can receive payment. So if you can make a reasonable offer early, you increase the chance of being accepted.
Make a reasonable offer.When purchasing a property in a traditional sale from the seller alone, a buyer may experiment by submitting a “lowball” offer, to see if it might get accepted. However, with a short sale, the lender often has a particular threshold that it needs to satisfy in order to accept any offer. If you submit an offer that is too low, you risk being rejected.
- Lenders generally favor offers that will pay off 85% or more of the owner’s debt to the bank. In a particularly troubled real estate market, however, you could be lucky and get approval for an offer of as low as 50%.
Verify your lending before making an offer.If you are serious about purchasing the property, you should try to get pre-approval for a loan before you submit an offer. Submit a copy of your pre-approval letter along with your offer to demonstrate to the owner and mortgage lender that you are serious and are prepared to complete the purchase.
Provide a sizable deposit.Any deposit that you submit along with your offer will be credited toward your purchase of the property. Providing a large deposit is another way of showing the owner and mortgage lender that you are serious about the purchase. Remember that the mortgage lender, in particular, is interested in going through the acceptance procedure only once. They do not want to investigate one buyer’s offer, only to have it fall through, and then have to begin again.
Completing the Sale
Work with your real estate agent and lawyers.Once the offer is submitted, you will need to wait for approval of the offer from the mortgage holders. Your real estate agent or lawyer can help you understand the approval process and may be able to expedite the system.
- If time is a concern for you, your broker can help you submit an offer with a reasonable timing contingency. You can include language that clarifies that your offer is only good until a certain date, at which time it expires.
Ensure that the contract includes a short sale addendum.A short sale addendum is a special document that will report certain contingencies or variations on the sale that are particular to short sale agreements. An experienced real estate broker or lawyer can help you identify these variations and put them into writing to best protect your interests. Some of the items for a short sale addendum include the following:
- Any agreed contingencies upon which the sale might be canceled
- A statement of the lender’s approval of the short sale
- Specific time constraints, generally set by the buyer
- Release of the buyer’s earnest money deposit
- Information about property inspections
- Statement about each party’s responsibility for closing costs
- Consideration of multiple offers on the property.
Assist in completing the settlement statement.A settlement statement is a document that describes the finances involved in the sale. It demonstrates to the mortgage holder and seller that the buyer is financially able to complete the purchase. The settlement statement will also list any unusual expenses that are going to be part of the closing.
Participate in the closing.A real estate closing is the formal meeting that completes the sale of real estate. The real estate closing generally involves the buyer, seller, lawyers for each, real estate broker, and, for a short sale, representatives of the mortgage holders. At the closing, the payment actually transfers from the buyer to the seller, with payoffs to the lenders. The deed and mortgage, if necessary for the buyer, are executed and prepared for filing. This is the final stage in buying the property.
Understanding Legal and Contract Issues
Know the definition of a “short sale.” A short sale is a phrase used to indicate that the owner is facing foreclosure. However, rather than foreclose on the property, the mortgage lender has agreed to let the owner sell the property for an amount less than what is owed on the mortgage. Thus, the name comes from the fact that the sale price will be “short” of the amount due to the lender.
Understand the mortgage lender’s role in the short sale.The mortgage lender has a greater role in a short sale than in a more traditional real estate sale. Under normal circumstances, an owner is free to market the property and decide the sale price. However, in a short sale, because the full sale amount will be going to the mortgage lender, the mortgage lender has the power to decide whether an offer is satisfactory.
Realize the overall benefits of the short sale.A short sale, though out of the ordinary, serves some beneficial purposes for several parties involved. Avoiding a foreclosure will often result in less of a negative impact on a property owner's credit rating. The mortgage lender, although collecting less than the full amount due, will avoid the costs of a foreclosure and maximize its collection. The buyer will have a chance to buy the property, perhaps at a savings,with a bit more certainty than at a foreclosure.
Be flexible with timing for the short sale.Buying through a short sale process can sometimes take longer than a traditional sale and allows less scheduling certainty. The lender must grant permission of the sale price, and that may require various levels of administrative or legal approval. You cannot expect a response to your offer right away, as you might if the owner alone were selling the property.
Understand that you are buying the property in “as is” condition.With a traditional real estate sale, part of the offer and acceptance process generally involves allowing the buyer to get a certified home inspection. If the buyer is not satisfied with the condition of the property, the sale is not enforced. However, a short sale does not always allow this step. You may need to take some added risk and buy the property without an inspection.
- If you are allowed the opportunity of getting the house inspected, you cannot expect the lender to reduce its price because of whatever your inspector may find.
Be ready to pay higher closing costs.In a traditional sale, the owner/seller usually accepts certain closing costs as incentive to complete the sale. With a short sale, the mortgage lender does not want to take on these costs because they will diminish an already short payoff. As a result, the buyer may need to pay some of these costs.
QuestionWhat is the procedure for HUD approval of a short sale?wikiHow ContributorCommunity AnswerThe phrase "HUD approval" refers to the HUD-1 document, also called the "Settlement Statement." This is a document that the lawyers or real estate agents generally prepare that itemizes all of the costs and fees involved with the sale. It spells out which party to the sale will be responsible for every penny involved. For a short sale, officers at the selling bank, the buyer's bank, and any junior lien holders will review the HUD carefully. Each of the lien holders is interested in seeing the payoff that they will receive. They also have an interest in reducing costs and fees, which increases payoff. The buyer's bank will scrutinize the HUD to reduce the amount of the loan that is necessary. This review can sometimes be a lengthy process of negotiation and revisions, until all parties are satisfied with the document. As a buyer, there is not much that you can do to speed up this part of the process.Thanks!
QuestionHow do I apply for a loan?wikiHow ContributorCommunity AnswerSee the wikiHow article, "How to Get a Loan."Thanks!
QuestionWhat is the down payment on a short sale.wikiHow ContributorCommunity AnswerThere is no single answer to this question. The down payment is an issue between you and your own mortgage lender who will finance your purchase. Some FHA loans are available for as low as a 3% down payment. Other lenders may require 10% or 20%, or require you to pay for PMI, Personal Mortgage Insurance. Shop around and ask lenders about their requirements.Thanks!
- As with any legal transaction, you may want to enlist the aid of a real estate attorney if you are looking to buy a property through a short sale. An attorney can help you understand the procedures and help you complete all the paperwork properly so you maximize your best deal.
Video: How to buy a house with a short sale, Part 1
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