Buying Short Sales

You've heard the expression:  "The three most important  things in real estate are location, location, location."

Well the three most important things in short sales are:  "Patience, Patience, Patience."   Here's why: 

A short sale is an agreement between the owner of real estate and the bank that holds the mortgage to accept less than is owed on the mortgage so that the owner can get out from under the debt and avoid foreclosure.  That is the very short definition.  The actual process is more complicated and time consuming.  For any number of reasons, the ower is having difficulty making the mortgage payment.  They may already be in default or are anticipating being in default.   The owner has tried to sell their property at market value, which would cover the amount owed plus  closing costs and commission, but due to market conditions has been unable to do so. 

The owner has 3 choices at this point:  1)  Loan modification  2) Short Sale 3) Foreclosure

1) Loan modification is just what it says.  The owner and lender work together to modify the terms of the original loan to make the payments more affordable and something the owner can handle.

2) Short sale:  not a great option but far less devastating to the owner's credit than a foreclosure.  Short sales will have an 80-100 point negative effect on FICO short.

3) Allow the foreclosure process to continue. The owner is eventually out from under the debt but with a 7 year blemish on their credit record.

So, the owner has decided to do a SHORT SALE.  With the help of an experienced Realtor the property goes on the market at or near market value, but ONLY for a brief period.   Since time is of the essence in a short sale, the list price is lowered on a periodic basis until a buyer steps forward and makes and offer.   Up until this point  there have been NO negotiations between the owner and the bank.  Once an offer has been received, the negotiations between owner and bank begin.  This is where patience on the buyer's part becomes important.  

The owner has to prove to the bank that they will not be able to make payments.  That involves financial statements, tax returns, hardship letters, and any other documentation required by the bank.  The owner is essentially asking the bank to forgive part of the indebtness.  Most banks will not do that willingly.  The owner must convince the bank that it is in the best interest of the bank to accept the short sale.   Since banks are handling a huge number of distressed properties, the process is a slow one.  Unfortunately, the buyer and the buyer's agent may not be privy to all the conversation and exchange of information and may feel out of the loop.  It is easy for buyers to become frustrated with the entire process and walk away.  Another risk with a short sale is that after all the waiting, the bank may very well not accept the offer and the process for the buyer starts all over. 

The entire short sale process can take 3 to 6 months to complete.  If you are interested in buying a short sale, it is quite possible to get a very good deal.  We have had success with short sales.  Once the bank has accepted an offer, the purchasing process follows the traditional path and can usually be closed in 30 days. 

Notes on Short Sales:

1) Property condition is usually good.  Since it is still owned by the seller and they are trying to sell, it is in their best interest to keep the property in the best condition possible. 
2) As with foreclosures, buyers will need a pre-approval letter from their lender of choice.
3) Buyers can expect to put up earnest money, usually $1000 depending on the property.
4) All other terms and condition of traditional sales will apply (i.e. home inspections, appraisals, surveys, etc)

The short sale process can be intense and there are pitfalls that need to be avoided.   More than ever it is important for buyers to solicit the assistance of an EXPERT. 

Call the DREAM TEAM for more information.   You can see a list of short sales in the search menu to the left.