There are less active buyers in the real estate market nowadays…and each one of these have been looking at a foreclosure or a short sale.

What is a short sale?  It’s when a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property.  The lender forgives the remaining balance of the loan.

Everyone wins…or loses

Short sales are a mixed bag for the seller, lender and the buyer.

The short sale will likely damage the seller’s credit but not as bad as a foreclosure.

The buyer gets the property at a reduced price but the property has its share of problems (fixer upper) and will need to go through some red tape in order to make the deal happen.

The lender takes a financial loss but perhaps not as large of a loss if it foreclosed on the property.

Can it work for you?

Buying a home in a short sale can be a hassle.  You are usually getting the property at a substantial discount.  Since the lender is eager to continue to get paid back the money it loan out, it may offer favorable financing terms.  A short sale is on real estate deal that needs the help of an experienced agent or attorney since not all agents know how to handle a short sale.

Why lenders agree

More lenders are willing to consider approving short sales due to a large number of struggling borrowers losing their homes and they are starting to accept the inevitable and will try to minimize their loss.

1. Identify potential short sales – Locate the pre-foreclosures and determine how much is owed on the house in relation to the value.  If it seems high, it’ll be a good candidate because it indicates the seller might have trouble selling it enough to satisfy the loan.
2. View the property – Examine its condition and come up with a rough estimate and how much it will take to repair or renovate.
3. Do your research – What is the property worth?  What is the profit potential?  You’ll want to profit from the deal.
4. Find all liens and mortgages.  Ask the seller or his agent what the liens are on the property and which lender is the primary lien holder.
5. Figure out the financing – This is very critical.  In a short sale, you need to have the ability to move quickly.  If the agreement is worked out, it’s common that the lender will require closing in as few as 20 days.
6. Contact the lender – You or your agent needs to speak with the loss mitigation department.  Find the decision maker!
7. Complete the lender’s short sale application, if they have one – Many lenders have an application specifically for a short sale request.
8. Assemble the proposal – The proposal comes in a package of materials including the application, authorization letter, the purchase and sale contract, a hardship letter, a statement of the property’s value, detail the costs and liabilities and the settlement statement.
9. Negotiate – It’s not uncommon for the lender to reject the offer or to come with a counter.  Beforehand, you should figure out what your absolute highest limit is and don’t be afraid to walk away if the lender won’t meet the figure.
10. Seal the deal – Once you’ve reached an agreement that all 3 parties are in agreement with, make sure the seller understands all of the terms of the deal.