Buying a Short Sale
A house in pre-foreclosure opens up the possibility of a short sale. Essentially, the owner has either defaulted on their mortgage, usually not paying for 90 days, or is underwater and owes more on the home than its market value. There are both major benefits and disadvantages in trying to buy a house through a short sale.
Pros of Buying Short Sale Homes
- Price. This is the biggest benefit of a short sale. The seller wants to sell the house quickly. While they are trying to make as much money as possible, to cover as much of their mortgage loan as possible, they will often set the price lower than market value. Think of it this way: If it goes to auction, it’s possible less money will be made for the lender, so there is an incentive for all parties to make a short sale.
- Less risk. In a foreclosure, the now-previous owner could damage the property out of spite. Because a short sale happens before the foreclosure is finalized, the owner will likely not neglect or damage the property. This way, they can get higher offers to cover more of their loan. The owner is also an active participant in the sale, unlike in a foreclosure, where you only deal with the lender.
- Competition. Because of how long a short sale can take (more on that in a moment), buyers often pass over pre-foreclosures. If you have the luxury of time, you can wait for the paperwork to go through the lender and get an awesome deal.
Cons of Buying Short Sale Homes
- Time. A short sale has to go not only through the owner, but the lender. The lender has to approve the offer, which might be put to a committee, and the bank can drag its feet. Meanwhile, the clock does not stop on putting the house to auction.
- It’s complicated. There may be multiple lenders, with a secondary loan that also wants part of the money, but a primary loan that takes precedence. It’s also not something a regular real estate agent with no short sale experience could be equipped to handle.
- Repairs. Even if the owner hasn’t purposefully damaged the property, the reason they are in this situation is likely lack of money. This might mean they let repairs fall by the wayside, and it might fall on you to make the repairs. Make sure you do an inspection before committing to buying, and if repairs are too extensive, back away. Don’t expect asking for a lower sale price to account for repairs to be met with anything but laughter.
- The lender can say no. Even if you go through the entire process, and the owner accepts your offer, the lender could still turn down your offer. Or, they will very likely make a counter offer at a higher price — remember, they are trying to make as much money as possible.
Buying Foreclosure vs Short Sale Property
The major difference in buying a foreclosure instead of a short sale is in who you are dealing with. In a short sale, you deal with both the owner of the property and the lender. Both have to approve the sale, though the lender’s decision carries the most weight. In a foreclosure, the lender is now also the owner.
How To Buy a Short Sale
Get a Real Estate Agent
Short sales are complicated, and there are more laws surrounding pre- and foreclosures than a regular sale. In order to navigate the murky waters of short sales, it’s important to have a real estate agent well-versed in buying and selling short sales. The selling agent also hopefully has experience, as well. Having experienced agents can help speed the process along, while also protecting you as a buyer.
Check Public Records
The entire foreclosure process plays out in court, with documents filed at each major step. You can use this to your advantage by seeing how far along the house is, how much it was appraised at — and thus how much you might be willing to offer — and even see what houses might be available, but not actually on the market yet.
Aside from foreclosure status, you can also see if there are liens or multiple loans on a home, both of which can complicate the buying process and possibly even affect the cost of the house. A default on the mortgage instead of just being underwater could make the difference between the lender accepting the offer or not; they may not want to accept until there is a default.
Finally, if you see the owner has filed for bankruptcy, forget about the short sale and wait for the auction. A short sale, in this case, would be considered a collections activity, which are no allowed in bankruptcies.
Negotiate With the Seller
Once you have done your research, you can start negotiating with the seller. Remember, you have to satisfy both the seller and the lender, and the lender can refuse the sale. The owner, however, may be desperate for money and willing to haggle. Talk with your agent to come up with a good number to suggest, and be sure you know the rules before making your offer. Be wary for fraud and scams, as well, as the seller may want money for the supposed right to even make the offer. This is illegal, and should be reported.
Submit Your Offer to the Lender
Finally, it’s time to submit your offer to the lender. You’ll need the sale contract, signed by both you and the seller. You will need a sizable down payment to prove to the lender you can do a better job of paying the mortgage than the last owner. You’ll also need a hardship letter from the seller, explaining why they can’t pay the loan and won’t be able to in the near future.
Include an Appraisal
While not needed, it will be advantageous to include an appraiser or broker’s official opinion on the price of the property, with details as to how they arrived at this price. This can sway the lender, if they can be convinced the home is worth the price you are offering. You can make the case for a lower price for repairs, but don’t expect much, if any, give.
Settlement Statement
The last piece of information is a settlement statement, also called a net sheet, that details the purchase price, closing cost, and any other related fees. This can be prepared by the closing agent or a real estate lawyer.
Once submitted, the waiting game begins. It could take a few weeks or even a couple months to hear back from the lender, and it will likely be in the form of a counteroffer — or an outright rejection. Don’t be afraid to walk away if their counteroffer is above your maximum limit.
If the lender instead agrees, then you move on to closing, just as you would with a normal home sale, and the property is soon yours.
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