HOW TO BUY A SHORT SALE

A Short Sale is the sale of property where the lender(s) have agreed to allow a property to be sold where the loan(s) and costs of sale are greater than the proceeds generated from the sale of the property. The reason it is called a, “Short” Sale is because the proceeds generated from the sale are short of the amount necessary to satisfy the lender(s).

Example:

Mr. & Mrs. St.John own a home that is currently worth $250,000.00.

Mr. & Mrs. St.John owe $300,000.00 on the first loan held by Bank of America.

Mr. & Mrs. St.John also have a second loan (Home Equity Loan) on the home through Wells Fargo of $200,000.00.

The total amount owed on the property is $500,000.00. 

The costs of selling the Mr. & Mrs. Smith’s home are 8% or $20,000.00 based on a sales price of $250,000.00. 

When Mr. & Mrs. St.John’s home is sold for $250,000.00 the total cost to sell the property including paying off the first and second loan will be $520,000.00. Bank of America and Wells Fargo will then have to accept a loss of $270,000.00 and determine how much of the loss each company will accept.

Reasons for Aggressive Short Sale Pricing

Short Sales may represent an opportunity to buy a property below the current market value since the Seller is most likely in foreclosure, and the agent representing the Seller realizes there may not be much time to successfully market the property. The listing agent also knows that the Seller will not receive any proceeds from the sale and that every payment missed is a blemish on the Seller’s credit. This gives the listing agent greater latitude in pricing the property since there is no upside for the Seller, accept to get rid of the property, and to minimize the credit damage. The Seller is also being bombarded with calls and letters (including the notification of the Trustee's/Foreclosure Sale) from their lender(s). This never ending barrage of negative reinforcement takes a psychological toll on the Seller typically making them willing to accept almost any offer presented. These are the primary factors that contribute to Aggressive Short Sale Pricing.

Making an offer to purchase a Short Sale Property

It is important to recognize that the any contract offered, presented and accepted by the Seller will take time, realistically months from the date presented to close escrow. If you are in a hurry to get into a home we would highly recommend you turn your attention to a different segment of the housing market. That being said if your have the time and patience the rewards can be great in the Short Sale Market.

When drafting any purchase contract you must first define your goal or need and then keep the Seller’s best interest or comfort in mind. This may allow you to advance your offer past those that may create a higher net to the bank, by helping the Seller out of an uncomfortable position. Remember the lender(s) will not allow the Seller to net any proceeds from the sale (some relocation funds may be available) so your goal is to engineer a contract that is most convenient for the Seller, because they will choose which offer or offer(s) will be forwarded to the lender(s) for approval. It is important that you work with an experienced Short Sale Realtor® or representative when questioning the Listing Realtor® regarding the current status of the property, whether or not offers have been submitted, whether the Seller has provided the lender(s) required documentation* (see * in the Short Sale Approval Process section), and what process they will use in the event multiple offers are submitted. Once you have determined how the Listing Realtor® and Sellers will handle the offers you can create a strategy that focuses on satisfying the Seller, Listing Realtor®, and Seller's Lender(s).

Cash V.S. Financed Contracts

This may sound crazy but we have had several mortgage company representatives called,  “Negotiators” (because they negotiate with the Seller, Investors and Mortgage Insurance Company), explain that whether the offer is cash or financed makes no difference to the lender(s)! The explanation we have been given is that they are expecting a certain net at close of escrow from the Seller and how the Seller gets the funds is immaterial.

The Short Sale Approval Process

Congratulations, if you have managed to get your contract accepted now is the time to get comfortable and wait! The approval process called loss mitigation by lenders is extremely cumbersome and filled with delays. Like waiting on a late departure at the airport, there is always something that needs to get done before you can be on your way. The Seller and the Listing Realtor® must compile a complete package containing all the mortgage company required documentation:

*2 Years Tax Returns, W-2’s, Profit & Loss (Self-Employed), Paystubs for the last 2 months, Bank statements for the past 2 Months, Hardship Letter and or Affidavit, Financial Analysis, Copy of the Listing Agreement, Third Party Authorization, Copy of the Contract, Settlement Statement or HUD1, and Comparable Sales Figures.

Most lenders have a department that deals with loans that are non-performing or in default. These departments are most often called Loss Mitigation Departments, since they attempt to minimize the lenders losses. It is important to note that each lender has its own way of dealing with the approval process. This approval process includes contacting the investors and the mortgage insurance company.

Once the investor and mortgage insurance requirements are satisfied the lender can generate the, “Conditional Sales Approval Letter” more commonly known as the, “Agreement Notice”. This letter will dictate the terms the lender is willing to accept and include a dollar amount that the lender must receive by a specific date. All interested parties now review the document forwarded by the lender hoping that your existing contract meets the criteria. In the event the Seller is not satisfied with the terms of the Agreement Notice may elect to cancel the contract. Once the approval is issued and assuming it meets with the Seller’s and approval the transaction will continue as a regular sale. We have seen this process take from as little as two weeks and in excess of eight months. Currently we are estimating 3 months to close a sale on a property with one lender.