A real estate short sale is when a lender agrees to sell a property at a price that is less than what is owed.
Although short sales sometimes do result in buyers getting a good deal, they are often murky, nerve-wracking transactions that can overwhelm an uninformed buyer.
Here are 10 things a short sale chaser can do to minimize the risk and agitation that can accompany real estate short sales.
1. Choose carefully. It's important to work with a licensed real estate agent with short sales experience. An experienced agent is invaluable in successfully guiding a novice short sale buyer through the many complexities of this type of purchase.
2. Assess the situation. Many states do not require that sellers market a short sale property as a short sale, so it is important to find out the status of a property before requesting a tour.
3. Be prepared. There’s really no point in a buyer making an offer on a short sale property they will not qualify to purchase. Learn the difference between a pre-qualification and a pre-approval letter. In a traditional property purchase, a seller may proceed with negotiations with a pre-qualification letter. However, a lender on a short sale property will require a pre-approval letter and proof of funds for the down payment and closing costs in order to even look at an offer.
4. Do your homework. Find out who is the title holder of the property, whether the lender has begun foreclosure proceedings, how much is owed to the lender(s) and at what price comparable properties in the area are selling. This will help determine how much to offer on a short sale property. Keep in mind that not all short sales are in default.
5. Grill the listing agent. Do not hesitate to pump the listing agent for vital information about a property. Be sure to ask about the following:
- Find out if the seller has been approved for a hardship sell. In order for a seller to qualify for a short sale, they are required to prove to their lender that they cannot afford to keep the property. If the seller has not already been or cannot be approved for a hardship sale, any negotiations between buyer and seller may be moot.
- Find out if the bank has approved the asking price. Ultimately, it's the lender who decides what amount they will accept as a short sale. If a home is priced at $500,000 and a lender has not approved that figure as an asking or purchase price, a buyer may just be spinning their wheels making an offer of $450,000 if in the end the bank will require a buyer pay $550,000 in order to accept the short sale.
- Find out if the loan has private mortgage insurance, which protects the lender in the event of default. Sometimes it's financially advantageous for the lender to foreclose and collect the insurance rather than accept a short sale.
- Find out if the seller has stopped making payments on the property. Although the seller must provide clear title on a property in order to close, sometimes buyers are asked to cover any amounts owed in unpaid mortgage payments, back taxes and liens. Should this happen, buyers should always negotiate for the lender or the seller to cover those costs.
- Find out if there are any received offers the seller is currently waiting to hear back from the bank about. If there are already a number of offers on the property, a buyer may choose to back away from the property or they may choose to put in a strong offer knowing they have to rise above any other offers already on the table.
6. Beware of a second mortgage. Find out if there is a second (or third) loan on the property and who holds them. Also be aware of any lines of credit that have been extended to the seller. All lenders and lien holders on a property must approve the short sale price in order for the transaction to close.
7. Do inspections. Short sale properties are typically sold “as is,” and lenders often will not pay for things that sellers usually do such as a home protection plan or a pest/termite inspection. Make sure your contract reserves the right to conduct inspections. Although a buyer is unlikely to convince the seller or the lender to fix any problems that are revealed in an inspection, the buyer should know exactly what issues there are with the property before buying.
8. Get a leg up. Consider taking a mortgage from the same lender that holds the first mortgage. Whatever amount a lender loses on the front end of a short sale is easily made up many times over during the life of the loan. This can be an attractive incentive for the lender to move forward with a particular buyer.
9. Watch your back. Lenders can be capricious, and typically reserve the right to change the terms of a short sale contract at any time. In some cases, the sales contract you submit to the lender is not the same one that is returned. As tedious as it may be, read every word of the bank’s contract and consider having a real estate attorney review the documents because real estate laws differ from state to state. Ask your agent to add a clause to the contract that gives you the option to terminate the contract if the short sale is not approved or closed by a certain date.
10. Relax. Patience is indeed a virtue when it comes to short sales. A short sale transaction moves at the pace of the lender and no one else. Although it is possible to close a short sale in 30 days, many take four to six months and sometimes even longer.