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A Short Sale is the sale of a house in which the proceeds fall short of what the owner still owes on the house. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender and owner can avoid foreclosure which can be a lengthy process and expensive for the Bank. The seller need not be in default -- to have stopped making mortgage payments -- before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may 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.
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.
There are an increasing number of short sales in our market. Many of these homes are attractively priced and the sellers are motivated to avoid foreclosure. Buyers should be aware that this can be a lengthy process which requires a lot of patience and may not end in success. There is no guarantee that the bank will accept an offer, even if it is at or above list price.
Hire an Agent with Short Sale Experience
It is critical that you are represented by your own agent in buying any property but particularly in buying a short sale or foreclosure. You need an experienced short sale agent. Your agent can find out who is on 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. Keep in mind that the contracts you ultimately sign and what you are asked to agree to in terms of time frames for inspections and contingency removal may be different than in a ”normal” transaction. It is important that your agent be conversant in the contracts and addendums and in the process of negotiating a short sale purchase.
If there are two loans, it may be more challenging to get an offer accepted. The first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. The first will need to givesomething to the second to gain its cooperation or you will not be able to get your offer accepted...
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. Worse you do not want to find that you have “passively” removed contingencies you did not want to remove because your agent was not watching the calendar and expediting inspections or the appraisal.
Submit Documentation & Purchase Offer to Lender
Once the seller has accepted the offer (which will be contingent on the lender’s approval of the short sale), it will be sent to the lender for approval either by a Short Sale Facilitator or the listing Agent. You do not have an agreement until the lender accepts. Your agent should put together an offer package that includes an Agency disclosure, the offer, a copy of your deposit check, Short Sale Addendum, letter of pre-approval and other documents.
Your offer is contingent upon the lender's acceptance. The Short Sale Addendum gives the lender a time frame in which to respond, after which, you will be free to cancel. Creating a time in which the lender must respond is critical.
Some lenders submit short sales to committee, but many times the negotiator has decision making authority. This does not mean this will be a quick process by any means. Short Sales require immense patience on the part of the agents and the buyer.
Inspections Are Critical
It is extremely important that you obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, chimney or fireplace inspections. This is true in any real estate transaction and you will sign many documents advising you of your right and responsibility to conduct these inspections. Most short sales are sold “as is”. The seller has no money to do any repairs and the lender will rarely agree to.
Typically, the lender will not pay for those things that you might request of a seller in a “normal” transaction. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections.
I track REO and Short Sale opportunities for my clients and can set up a daily update so that you are emailed every time a new REO or Short Sale property comes on the market. If you are interested in knowing more about the great opportunities for buyers in this market, please call or email me.