Before You Buy a Short Sale
by Elizabeth Weintraub
www.about.com
Buyers pursue short sales to get a good deal. So when you see a price listed for
a home that you think is too low for the neighborhood, before you jump on that
price like hot fudge on a sundae, ask your agent to call the listing agent to
find out if the home is a short sale.
Because you might want to think twice about making an offer on a
pre-foreclosure, short sale home. It's not as simple as you may believe, and
very few can close in 30 days or less.
What is a Short Sale?
A short sale means the seller's lender is accepting a discounted payoff to
release an existing mortgage. Just because a property is listed with short sale
terms does not mean the lender will accept your offer, even if the seller
accepts it.
Be aware that the seller will need to be in default, to have stopped making
mortgage payments, before a lender will consider a short sale. Also, the seller
might have over-encumbered, owe more than the home is worth, so a discounted
price might bring the price in line with market value, not below it.
Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who
is in title, whether a foreclosure notice has been filed and how much is owed to
the lender(s). This is important because it will help you to determine how much
to offer.
If there are two loans, you will probably deal with the second mortgage lender.
The first mortgage lender's position is protected by the second lender unless
the second lender does not want to foreclose. For example, if a seller owes
$160,000 to the first lender and $40,000 to the second lender, you cannot offer
$160,000 because it will wipe out the second lender.
Hire an Agent with Short Sale Experience
It's one strike against you if the listing agent has never handled a short sale,
but it's even worse if your own agent has no experience in that arena. You need
an experienced short sale agent.
An agent with experience in short sales will help to expedite your transaction
and protect your interests. You don't want to miss any important detail due to
inexperience or find out your transaction is not going to close on time because
no one has followed up in a timely manner.
Prepare the Seller for Lender Demands
A lender is not going to agree to a short sale unless the seller has no equity
and is unable to repay the difference between your sales price and the existing
loans. Sellers need to provide a hardship letter to the lender. Sellers may also
owe taxes on the amount of debt that is forgiven.
A seller I know once demanded that the buyer slip the seller $1,000 to be given
the right to purchase the seller's property. We said no. This is fraud. The
lender legally pursued that seller. Do not be lured by sellers who suggest this
practice. In a short sale, the seller receives no money because the lender is
losing money.
Submit Documentation & Purchase Offer to Lender
Once the seller has accepted your offer, send it to the lender for approval. You
do not have a deal until the lender accepts. Also, send the lender a copy of
your earnest money deposit. Do not be astonished if the lender asks you to
increase it.
In addition, the lender will want to see that you have your own loan available
and you are preapproved. Send a preapproval letter to the lender. It will help
if your agent sends a list of comparable sales that support the price you are
offering to pay for the home.
Give the Lender a Deadline
Make your offer contingent upon the lender's acceptance. Give the lender a time
frame in which to respond, after which, you will be free to cancel. If the
lender is under no pressure to make a decision, the paperwork will sit on an
underling's desk.
Some lenders submit short sales to committee, but most can make a decision
within two to three weeks, providing you have submitted the offer to the
individual in decision-making capacity. Get a name and phone number for the
appropriate contact at the lender. Don't send an offer blindly to a department.
Expect Commission Negotiations
Regardless of the commission the seller has agreed to pay, the lender is
actually the entity paying the commission. The reason is the seller is not
receiving any money with which to pay a commission. Since the lender is losing
money, the lender will likely negotiate the commission directly with the listing
broker, who will then share the commission with your agent.
If you have signed a buyer's broker agreement with your agent, ask if the agent
will waive the difference due or you might have to pay it out of your pocket.
Some brokers feel it is unfair to penalize the agent, but the lender is calling
the shots.
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay.
These include home protection plans for the buyer, buyer credits of any kind and
pest / termite inspections. A buyer will be asked to purchase the property "as
is," which means no repairs.
It is extremely important that a buyer obtain a home inspection and pay for
other types of inspections such as pest, roof, sewers, septic tanks, chimney or
fireplace inspections. Do not waive your right to obtain these inspections and
make your offer contingent on approving them