There are fewer active buyers in the real estate market these days — but every one of them seems to be looking for a real bargain. For many buyers, the perceived bargain is the short sale or the foreclosure.
Foreclosure is a fairly well understood process, but as “short sale” listings become more common, you may wonder what the term means.
When a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it’s called a short sale. The lender forgives the remaining balance of the loan.Can it work for you?
Buying a property that is in a short sale can be difficult, so why should you consider it? It boils down to the bottom line. You’ll get the property for a substantial discount, because the lender is eager to continue to get paid back the money it loaned out, and the lender may also offer favorable financing terms.
Here are 10 important steps when considering a short sale:
1. Get a CSSP Certified Agent, and have them identify potential short sales. This is by and away your most important step. The biggest problem with short sales transactions is knowing whether a transaction will be successful. The CSSP Designation is given to those Realtors® who are certified short sale professionals. The CSSP designation is managed by the Short-Sale Council, an exclusive membership organization specializing in assisting agents is mastering the skills of managing short-sale transactions. Your CSSP Buyers Agent will locate pre-foreclosures (properties which may soon be in foreclosure) in your area. They will use an online database, search courthouse listings, legal ads or by assistance from title representatives. (Be sure to read my post, 10 Worst Buyer Mistakes, which stresses the importance of hiring a buyer’s agent.)
2. Figure out the financing Get pre-approved for your financing. You have to know how you’re going to pay for the property. If you’re a good credit risk, the existing lender may be willing to give you a loan. Because they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage.
3. View the properties your agent selects for you Gauge each home’s condition and come up with a rough estimate of how much it’s going to take to repair or renovate. If it needs work, many “normal” buyers won’t consider it, which is good for you.
4. Do your research What is the property worth? What’s the profit potential? If you’re an investor or even a homeowner planning to live in the home a short time you’ll want to profit from the short sale.
5. Find all liens and mortgages The agent will ask the seller or his agent what liens are on the property, and which lender is the primary lien holder. In addition, your agent will run a title check looking for undisclosed liens.
6. Contact the lender The seller’s agent will speak with the loss mitigation department (or perhaps the resource recovery department) rather than the collection or customer service department, which is only interested in recouping past due loan payments. You may need to have the homeowner complete and sign (notarization is usually required) an authorization letter, which gives the lender permission to discuss the mortgage situation with you.
7. Complete the lender’s short sale application, if they have one. Many lenders have an application specifically for a short sale request.
8. Assemble the proposal. The proposal generally consists of a package of materials including the application and authorization letter plus:
The purchase and sale contract — signed by you and the seller — to buy the property for a specified price
A hardship letter. It’s important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments — usually 90 days.
A statement of the property’s value. This can be an appraisal or a broker’s price opinion.
Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands.
A settlement statement. This statement (which can be prepared by a closing agent or real estate lawyer) outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property.
9. Negotiate It’s not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don’t be afraid to walk away if the lender won’t meet your figure.
10. An agreement is reached Once you’ve reached an agreement that all three parties (you, the seller and the lender) are OK with, get everything in writing and officially recorded. Make sure the seller understands all of the terms of the transaction. Next comes the closing and the property is yours.