So you are in the market for a house and you’re thinking of buying “short sale” but heard horror stories from your friends or your brother-in-law who took a real estate course three years ago and knows it all. But what do you really know about short sales and how it affects you as a buyer?
The reality is if you go in knowing what to expect and armed with a competent Realtor who understands short sales, you will be fine. If not, expect frustrations and if the deal does eventually close, you will feel like you earned a medal of valor at the end of the settlement process!
Let’s start by defining the term “Short Sale”. It is a sale of a property where seller owes the lender(s) more money than what it’s worth, and lender agrees to accept less money than what they are owed (short pay-off). Anytime a sale takes place under those conditions, it is considered a “Short Sale” transaction. As you may have guessed, the term “short’ in short sale comes from the seller’s pay-off to their lender being short on money.
So why would a lender ever accept less money than what they’re owed? Well it all comes down to the “bottom line”; if the lender thinks they can lose less money by foreclosing on a property and selling it at an auction, that’s what they will do. But if they think they will lose less money by granting a short sale, they will go that route. It all comes down to what’s in the lender’s best interest. Often times what’s in the lender’s best interest happens to be in the best interest of the seller, that’s when you as a buyer can make this process worthwhile for you.
So how does this work? First you find a property you’re interested in with your Realtor and then you make an offer, also known as “writing a contract”. If seller accepts your offer or counter-offer, the contract is then known to be “ratified”. The seller will have to accept your offer but make this acceptance “subject to third-party/lender approval”, meaning the lender to whom seller owes money has to now agree to the terms of the contract ratified by you and the seller.
By this time, the Realtor representing the seller should have assisted the seller in submitting an application for a short sale approval to the lender, known as a “package”. I will address the package in a future article but in short, this package is going to include all of the seller’s financial information, a letter explaining why a short sale is necessary, known as a “hardship letter”, and of course a copy of the ratified contract, as well as other documents justifying the seller’s request.
If the seller has more than one loan on the property, a package has to go to each lender for consideration. This is where you have to be patient because the lender has a lot of homework to do here. Remember, the seller is asking the lender to accept less money than what they are owed, in some cases it is a substantial amount of money. If that was your money, wouldn’t you want to take your time and give this careful consideration? This process can take anywhere from 3 to 10 weeks, often times longer. But eventually, the lender will come back with an answer: 1. Yes, 2. No, or 3. We want more money.
Whatever the lender’s answer is, as a buyer you are affected by it. If the answer is yes, then you go to settlement and all is well (of course that’s relative!). If the answer is No, you have no deal and you need to start all over again with another property. If the answer is lender wants more money, this is where it gets a little interesting. At this point, your experienced Realtor will really shine. Perhaps you can offer a little more money for the property, provided of course you were getting a good deal from the start. Or instead of offering more money you offer to make a lump-sum payment directly to the lender on behalf of the seller. There are many ways to get around the “we want more money” answer and again, your Realtor can assist here.
So is all this really worth it? It can be with the right property and the right seller and the right lender. Often times the lender may agree to accept an amount below the appraised value if the seller is willing to pay back some of the money he owes outside of your transaction (personal unsecured note).
Don’t forget that you as a buyer will get “clean” title to the property and of course don’t even think about buying a short sale without a title insurance owner’s policy. In fact, don’t think about ever buying any property without a title insurance owner’s policy but that’s a future article.
So what’s the bottom line on all this? Short Sales can be frustrating if you are not educated or if you don’t have a Realtor who can help you. But with the right information and representation, a short sale transaction can be very rewarding on many levels to all parties involved.