Short sales 101

One of the greatest myths in the world of real estate is that buying a home that’s in a pre-foreclosure state, or one that has already been foreclosed upon, will get you the very best deal possible. This is inaccurate for a number of reasons, though if you know what you’re looking at you can sometimes snag a bargain. There are a few things you need to know before making that leap the first time.

What is a Short Sale?

Short sales happen because a homeowner is in big trouble financially and needs to unload their house. They may be in a negative equity position (underwater) or simply lack the equity to sell their home. There was a time when homeowners had to miss a few payments before lenders would consider a short sale, but today there are conditions, like a sudden loss of income, that can make a short sale possible faster.

Short sales save the homeowner from a long and potentially credit damaging foreclosure. They save the bank from having to get lawyers involved to collect the home that’s collateral for the mortgage that’s in default. They don’t do anything for a buyer by design (that’s not to say that you can’t benefit from them, they just didn’t really consider buyers when creating this out for homeowners in trouble).

Buying a Short Sale Home: The Basics

To successfully navigate a short sale, you’re going to need a few things:

An experienced real estate agent. Writing a contract for a short sale is not like writing a contract for a standard home. There are usually a variety of clauses that must be included, as well as knowledge of what will and won’t be accepted in said contract to consider. Your interests have to be protected, which can really bloat a standard purchase agreement with a lot of extra verbiage.

A really good home inspector. When people ask their banks for permission to sell short, they’re not doing it because they’ve been spending all their extra money fixing up the place. Often, these homes are in some amount of disrepair due to neglect. When finances are tight enough to get a short sale approved, you can bet home improvements are far from the current owner’s mind.

Patience. It can take a very long time to get a short sale approved. If you’re looking to buy one as an investment, that wait might not matter, but if you want a place to call home, it’s going to be frustratingly long. This is because not only does the homeowner approve the contract, the bank has to, as well. If there are two or more banks involved, so much more the trouble. Buckle in, because it can take six weeks – six months — to close.

Liquid or liquidatable assets. Depending on the state of the home, you will likely have to put some money into it right away. A leaky roof and HVAC with issues aren’t cheap to fix.

It is highly recommended that you use a real estate agent to purchase a short sale. This point cannot be stressed enough. Short sales are not always deals, as stated above, because banks know what their property is worth — they’re not going to let you steal that house for a song. The banks involved are also unlikely to make repairs or give you any sort of concessions.

How Can Banks Afford to Do This?

The next time someone tells you that mortgage insurance is a waste and does nothing for anyone but the bank, remind them that MI is what makes short sales possible and often prevent long-term credit damage during a foreclosure. When a home qualifies to be a short sale, the bank is using proceeds from a claim against the mortgage insurance to make up the difference between what the sellers owe and what a buyer is giving.

MI can help prevent something known as a “bleeding foreclosure.” This is a foreclosure (or short sale) that has sold, but has a balance remaining that cannot be forgiven. Not all homes sold short will “bleed,” but it’s a potential in many states, especially if you’re not carrying MI on your mortgage. So, rather than pay extra every month for MI, you’ll be paying monthly for the outstanding balance on a house you no longer own.

Ready to Shop for Short Sale Homes?

Check out your local service providers in the HomeKeepr community. Not only can you find the best home inspectors, but you can be connected to electricians, HVAC installers, roofers, even bankers. You’ll know they’re good by the recommendations that your and other real estate agents have provided. Get your short sale team ready today at HomeKeepr!

Short Sales

Modern homebuyers will inevitably come across one or more properties currently classified as a short sale. A short sale is an attempt by the current owner to sell a home in lieu of the bank taking it back through foreclosure proceedings, thus partially salvaging their credit rating and lifting the burden of heavy mortgage debt.

The entire short sale process hinges on the hope that the bank will take a loss now, approve the sale, and eliminate the costly process of foreclosing, clearing, and reselling a home. Obviously, this is a big hope on behalf of prospective homebuyers as well and they need to understand some things in order to lessen the chance for disappointment of unapproved short sales. This is what they should know:

1) Price is usually set by the agent & seller, not bank - The agent and seller often create a very low asking price in order to attract buyers. The bank is normally unaware of the asking price; however, the bank has the final say in what an acceptable offer will be. Since the bank has the power to ultimately accept or deny offers, their lack of price awareness often leads to the process taking longer than anticipated. The bottom line is that the buyer needs to remain positive and patient throughout the entire process, sometimes even for months.

2) Loans owned by 1 bank usually better than 2 - If the seller has loans owned by two different banks it is a lot more difficult to approve the short sale. This is something the agent or the buyer cannot control; it simply depends on the willingness of the bank or banks involved. While the reasons are beyond the scope of this guide, buyers should know that when the seller only has loan(s) with one bank the short sale often becomes more buyer-friendly. A savvy Realtor can let you know this type of information.

3) Lowball offers get slow or no response - Remember that the bank is typically unaware of the pricing during a short sale. When lowball offers stream into the bank they are often scoffed at and rejected, giving the prospected buyers little or no feedback. Surprisingly, it may also take painstakingly long to hear back even on good offers due to the high volume of transactions lenders are inundated with these days.

4) Agent must check comparables before submitting offer - The agent must be sure to check recent home sales in the area to give buyers a better idea of the properties that are selling. This will give the agent and the seller appropriate grounds for an asking price that will be more likely to be approved by the bank. Checking comparables will also give the buyer a better knowledge of what price homes in the neighborhood are selling for and ultimately make them a more informed homebuyer.

5) Don't hang your hat on the property - Short sales aren't necessarily "short." It can sometimes be a very long process. Don't get your hopes up for just one property, keep your options open and continue to actively look at multiple properties. Buyers must remain optimistic, the right property will come along. In most areas it is completely legal and risk-free to have multiple offers out at any given time with the proper contingencies.

6) Sellers with other properties or too strong of financials may not qualify for short sale and/or may be asked to pay the difference - Sellers that own more than a handful of properties or have an extremely large net worth will probably not be eligible for short sale. In some cases the seller will be asked to pay the difference of the sale. The seller might even need to sign a promissory note stating that they will pay back all or most of the debt. This has virtually no effect on the buyer as long as the seller cooperates.

7) "Approved" prices are quickest - It is important to remember that short sales are not always timely; however, making an offer on an "approved short sale" can be a quicker process. An "approved short sale" has a price that has already been given the green light by the bank. This could be due to the fact that another interested buyer made an offer that was approved, but didn't end up buying the property. These types of short sales are some of the most highly desirable.

8) Some banks look want strongest buyers, some want strongest offers - The bank has all the power in approving short sales. The bank can pick the most appealing buyer, which may mean different things to different banks. Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment. Many buyers want to know if they will get a deeper discount for an all cash offer. This is very hard to predict and one will never really know until they make an offer. As long as the buyer is surrounded by a good team we would advise them to do just that.

9) Repairs are seldom done, credit is more frequent - If there are improvements that need to be made on a home, even if they are necessary to get a loan, it is often unlikely that they will be done. Typically there is some sort of credit issued and the buyer must take the responsibility of fixing anything that is broken.

10) When you get approval, must close on time - During a short sale there is no leniency with the closing escrow date as there often is in a traditional sale. During a short sale, exceptions are rarely made and the buyer must close on time. Because of this, it is important to take care of all loan paperwork immediately after opening escrow. We'd advise buyers to be extra prepared and try to have the loan finalized a few days in advance of the closing date. If there is going to be an issue that will prevent closing on time, a request for an extension will need to be made immediately. If the request is made early enough, many banks will grant an extension but don't just assume it will happen.

Conclusion
Short sales can be a great opportunity to find your new home at a competitive price. A Short sale could also be a major headache that lasts for months. It is important to have a good understanding of the factors that lead to a successful short sale to make it an enjoyable and profitable experience. We hope that these tips will help you to remain positive and optimistic throughout the process.

Todd Foust is the chief marketing executive for the FOUST Team at C21 Discovery; one of the top-selling real estate teams in Southern California. He specializes in Orange and Los Angeles Counties and operates one of the areas most informative real estate websites. To contact him or learn more about Anaheim real estate, please visit FOUSTonline.com.

About the Author: Jennifer McNamara works as a creative marketing contributor/manager for the FOUST Teams public relations division. She is a Southern California native and specializes in translating complicated real estate knowledge into user-friendly information for local homebuyers.