Short sales can be a way to get a discount in purchasing residential property, for living in or as an investment, or a journey in frustration with no deal at the end of the road. Here are some facts about what a short sale is and tips on how to navigate what many describe as a long and stressful process.
Defining “Short Sale”
In essence, a “short sale’ is the real estate transaction in which the proceeds from the sale are less than the amount of the loan or loans. Those multiple loans could include a mortgage and a home equity loan. When there are two lenders, they both have to approve the price and quality of buyer, adding another layer of uncertainty and possibly extending the period of waiting. Unlike traditional house purchases, they, not the seller, are the decision-makers.
In a short sale, the market value of the property is below the amount of the loan or loans and the owner has documented financial distress, which is an inability to keep up with payments. Sometimes no payments have been missed yet, but buyers provide evidence of current or future insolvency.
With the creditor or creditor’s approval, the owner is allowed to put up for sale the property at a price lower than the face amount of the loan or loans. Before buyers consider making an offer, they must check that the sellers have been approved for short sales. There have been situations in which property is put on the market prematurely as a short sale.
According to real estate data firm CoreLogic Inc., the final price of the short sale is about 10 percent lower than that of conventional real estate transactions. However, foreclosure sales are typically 30 percent lower.
The question then is why bargain hunters would pursue short sales instead of foreclosures. The answer is that since the seller is still in the house, unlike in foreclosures, the property tends to be in better condition. Before vacating in a foreclosure, owners could destroy the property and after they leave thieves could strip it, vandals trash it and the homeless inhabit it. Also, sellers will likely be cooperative in providing detailed information to the buyers about the property.
Searches for and making offers for short sales are very different than in conventional transactions. Here are some of the fundamentals.
- The Search: To identify property which will be sold as a short sale, contact a real estate agent experienced in this arduous procedure. This is a special area of expertise in real estate. You can also look for available properties in online databases, courthouse records and legal ads. The first step is to find out as much about the specific house and the neighborhood as you can and check market values for similar homes. Since it is difficult to get an offer approved, it’s necessary to continue to look at many other properties.
- Offer: Sellers and their agents often list low sale prices to attract potential buyers. However, those are irrelevant since the creditor or creditors decide the price. Lowball offers often receive no response or are countered by lenders with a much higher price. Your agent might be required to do a comparative market analysis (CMA) or a broker price opinion (BRO) about the market value of similar property in the area. That should guide what your offer should be. Another guide is what is known as the “approved offer,” which the lenders gave the okay for, but the buyer backed out before closing. After you submit the offer, along with “earnest money,” the waiting time could be months. Effective June 2012, the Federal Housing Finance Agency mandated that Fannie Mae and Freddie Mac must give an answer within 60 days. However, not all mortgages have been through those two and the wait for answers from the others could be much longer.
- Financing:To submit an offer, mortgage pre-approval is required. For buyers with good credit ratings, the lender holding the mortgage on the property might provide the financing. If the price is high enough, it’s in the lender’s self interest to finance the deal and prevent the expensive possibility of foreclosure. Since in short sales the closing usually must be completed quickly, the financing must be lined up before approval.
- Approvals:Lenders have diverse criteria on why they approve certain buyers. Some favor a hefty down payment. Some put the emphasis on quality of the buyer, such as overall financial profile including credit rating. Some prefer cash offers.
- Sold As-Is:Unlike traditional sales, sellers do not pay for inspections, buyer warranties and repairs. That means buyers have to have the financial resources to pay for what the sellers usually did and then for any necessary follow-up, including getting rid of termites or replacing a leaky roof. Sometimes credit is put toward the price for repairs. Much depends on how anxious lenders are to sell the property.
- Value:The difference between the amount due on the mortgage and the approved sales price does not necessarily indicate a bargain in terms of market value. The buyer might have overpaid for the property or borrowed more than the price of the property. That’s why buyers have to assess what comparable properties did or could sell for in that market.
- Legalities: Given the complexity, buyers need lawyers to oversee the writing of the offer. That should contain all the necessary contingencies, such as buyers specifying that if an offer is not accepted within a certain time period or the inspection discloses too many problems, they have a right to pull out. Those kinds of terms and conditions are self protective rather than aimed at pushing action on the part of lenders which have no incentive to cooperate with most buyers. The exceptions might include cash offers.
For the patient who can navigate the long stressful process of a short sale, the reward could be a discount on real estate which might appreciate in the future. This route is one option for bargain hunters in real estate, both ordinary people who intend to reside in the house and investors.