Real Estate Short Sale Guide

The short sale timeline can be a confusing one to all parties involved, especially the short sale buyer.

When a lender agrees to accept less than what is owed on the mortgage, it is called a short sale. The homeowner owns the property and selling it but the bank still needs to approve the sale and the asking price. There are no longer a buyer and seller in this real estate transaction, but a buyer, seller and the bank.

In most cases the property is sold “as is” but a buyer can still perform an inspection. The buyer will also need to pay for their own appraisal via their bank but the seller’s lender will also have an appraisal done. The final decision on price will be determined by the bank approving it on the BPO (broker price opinion) of the house. Sometimes the bank will come back with a counter offer for a higher price.

The time to close a short sale can range from anywhere as 6 weeks to several months. The buyer must be prepared to wait when buying a short sale.

Purchasing a Short Sale and its Risks

There could be a number of things wrong with the property if the property owner neglected maintenance to the property such as a leaky roof, old furnace or overgrown landscaping.

Buyers of short sales pursue these homes to get a good deal. But sometimes due to bidding wars, they aren’t such a great deal. Make sure you do your homework before overbidding for a property.

How Much To Offer On A Short Sale
Short Sale Pros and Cons
Short Sale Timeline

Get an Agent with Short Sales Experience

It’ll work strongly in your favor to get a real estate agent with short sale experience. They will be able to expedite your transaction and protect your best interests. You don’t want to miss any important details due to inexperience which could be costly to you.

Earnest Money and Short Sales
Short Sale Addendum
Biggest Issues with Short Sales

Home Qualification

The lender needs to agree to the short sale. Sellers will need to provide a hardship letter and a short sale package to the bank or lender. The bank’s loss mitigation department will handle the account and be in contact with the seller’s agent.

Countrywide Short Sale Process
Short Sale Owner Must Qualify
Sample Hardship Letter

Submit a Purchase Offer to the Lender

Once the seller has accepted your offer, send it to the lender for approval. The lender will want to see you’ve been approved for a loan.

10 Steps to Buying a Short Sale
How To Buy a Short Sale
Top Reasons Why Banks Reject Short Sales

Allow the Short Sale Lender Time to Respond to Your Offer

Your offer on the short is contingent on the lender’s acceptance. The timeline for response can take a short or very long time as they are under no pressure to make a decision and are currently overloaded with short sale requests. Some lender must submit short sale to a committee for approval and a decision cannot be made until a 2 or 3 weeks later at minimum.

Short Sale Lender Package
Why Banks Take So Long
Doing Short Sales with Lenders

Make Sure You Have a Home Inspection

Lenders will typically not pay for any fixes so make sure you perform a home inspection as the home will be sold “as is”. You want to make sure you know what you are getting into, so don’t waive the right to obtain these inspections and make your short sale offer contingent on approving them.

Short Sale Time Contingency
Managing Expectations for Short Sales
Typical Short Sale Transaction

For many buyers, going through the short sale process can be quite a journey. Why? Common complaints come from the involvement of the bank or lender in the short sale process. Of course, the lender has every right to be involved in the mortgage short sale since they will be taking the greatest financial hit by allowing “short sale debt forgiveness” on the amount still owed on the mortgage and paying a real estate commission all realtors involved in the transaction. It seems like quite a lot of money, but for the right sale price of the house, the lender can make out better than foreclosing on the property as that option can include some heavy attorney and legal fees to process.

In a lender short sale, the lender must approve the sale of the short sale after an offer has been submitted or more than one offer has been received. The bank will most likely come back with a short sale counter offer. If the counter is accepted the short sale process will quickly complete. The banks want to move this property off their hands since they are losing money each month on HOA dues, property taxes, mortgage and the condition of the house may deteriorate over time due to the owner not caring for the property.

To newcomers who are looking to buying a short sale home, the idea of having to wait for a response that could take up to a couple months can be mind-boggling. It’s frustrating to real estate agents too. Here are some common questions when purchasing a short sale. :

1) I made an offer on a short sale but it’s taking forever to hear a response from the bank? Can I withdraw my offer without a penalty?

Yes, you can rescind your short sale offer any time before the bank accepts your offer. To cover all bases, you should have signed a short sale addendum which states something along the line that: “Buyer can cancel this contract anytime before receipt of a Short Sale Agreement Notice from Seller”.

2) I need to move into a house soon. Can I buy a short sale?

If you are not prepared to wait for 3 to 6 months for that house, then don’t write a short sale offer. Short sales can take different amounts of time, depending on the lender you’re working with. Some are quick, some are slow…and some will not close and the house will go into foreclosure. You have to be prepared to wait. Patience is key.

3) How long does it take to buy a short sale (eshortsales.net) house?

It can take varying timelines. Normal time is about a couple of months. Be aware that you may get involved in bidding wars with other investors looking for a good price and whom are also willing to purchase with cash up front. Banks will prefer this method. Make sure to have a good real estate agent who understands short sales.

4) Should I buy a short sale property?

You must expect that things will go sideways in a short sale deals. A number of things can go wrong. The closing date could be delayed, the bank won’t approve the short sale price and it may or may not make any sense why, the utilities are shut off during the property inspection, the buyer’s agent often agrees to a short commission and the amount may change in the end. Depending on what you agreed at the beginning of the relationship, you may owe the difference. Make sure that isn’t the case.

5) What to do with the earnest check? Who do I make it out to?

Once your short sale offer has been accepted, make the check out to “Escrow to be Determined”. That way the check isn’t deposited prior to the bank’s acceptance. No one should have their check deposited until a confirmed reply in writing from the bank is received. Otherwise there is no deal since the seller does not have the final say in the deal.

6) What should I offer on a short sale?

When making an offer to the bank, make sure to start with a low price since the lender will most likely counter with a higher price. You could risk losing the property with too low a price, so make sure you research comparable homes in the area and do your homework. In your offer, make sure to account for any fixes the home since the bank will probably sell the home “as is” and you won’t be able to request any fixes. Ask your real estate agent to find out if there are any other offers on the house. If the house has been listed for quite some time and there is no other competing offers, you can probably get away with a much lower asking price.
If you are making an offer on a pre-approved short sale, then the bank will have set a minimum amount since a BPO (broker price opinion) would have been completed.

Buying a short sale without any idea on the process, or lack thereof can be a daunting situation to experience. Take heart that there are experienced real estate professionals that can assist you in making the right choices.

In today’s housing market, having 20% down to buy a short sale property is like being a king as you will be able to make your own deal, no matter who the seller is. For a good deal, look for people who have enough equity in their homes so that the sale price can cover much of the loan balance. Many people are desperate to sell their homes as their neighbors continue to reduce their price.

Determining Your Risk

Some short sales may have major issues with the house such as: electrical, foundation or plumbing. In these cases, you may not find the proper financing to get the property and won’t be able to do so until repairs are done. In these cases, unless you have hard cash to pay in full, walk way from the property as it can open up many risks to you as the buyer. You don’t want to perform repairs before closing escrow due to any of the following:

1) Your loan rate and terms expire and you are not able to qualify for a new loan within your terms.
2) The foreclosing lender will not give the seller an extension to the short sale and forecloses on the property.
3) The seller decides not to sell for whatever reason and cancels the contract after you’ve done the work.
4) Issues with repairs such as time and money may arise.
5) You are spending money on a house you don’t own and may never own.

Should You Wait to Buy?

Many real estate agents hear this lately as home buyers want to know is the market going to get worse?

There are an increasing number of short sales entering the market which is causing many challenges for real estate agents and their clients. The greater number of bank short sales on the housing market can help you get a possibly lower purchase price. Do your research, hire a good realtor and ask many questions to get the best deal possible.

Can you request for inspections or repairs with a short sale purchase? Well…yes, but don’t expect an answer. Many times the lender wants to sell the home “as is” and will not put in any money for repairs or inspections.

The bank or lender is selling the property for less money because there are no funds and the bank is losing money with this investment. Requesting repairs or inspections makes the bank lose even more money. But you can still write in the offer these requests to see if they are approved. There is always an exception and if the bank is desperate they will throw in some extra cash to get the property off their books.

When you make an offer on a short sale, be prepared to wait. It can be quite a long process and many times real estate agents will price the homes well below market value to get many offers on the home.

The bank isn’t going to to just give away the property, and will want to get the most return on their lost loan as they can. Since they are taking the greater financial loss, the bank has the final say and will try to wait out for the best offer as long as possible. The lender’s decision is based on not selling the property below a certain percentage of the appraised value and this guideline may be different from lender to lender.

When making an offer on a short sale property, it is important to start with a low price since a lender will typically counter with a higher offer, which can take up to 2 to 3 months. Although, it is taking a risk when asking for a low price…as you risk losing the property. Make sure you make your offer even more attractive by either offering a shorter escrow period, more of a down payment or a higher earnest deposit. Although each bank is different and each transaction is different in itself. If the real estate agent for the seller has done their homework and delivered a complete package with accurate information, the bank may be more willing to accept low offers on a listing price. It always helps to get a real estate agent that has the experience to process these types of properties for you.

It may take a month or even as long as 6 months to get a response from the bank after an offer. With any short sale offer remember to:

Once the approval is received from the bank, be prepared to move quickly.

Unfortunately about 80 percent of short sales may end up foreclosing due to Realtors not pricing them correctly or they are not managing the BPO process with the lender correctly. It’s very important for the lender to see that it is more cost effective to close as short sale vs. processing the property as a foreclosure.

Short Sales have increasingly become accepted as commonplace in many parts of the country, including the San Diego area. So, if you are ready to make an offer on a short sale in your area, are there contingencies in a short sale that you want included, and if so, can they be included?

The contingencies that will get accepted will most likely be the following:

Financial Contingency – Unless you are a cash buyer, you should make the offer contingent on your ability to obtain a mortgage loan.

Inspection Contingency – You will want to have an inspection, especially if the home is being sold “as is” and there will be no repairs made to the house. Otherwise the bank will require you to purchase the home as is.

Offer Contingency – Make the short sale offer contingent on the bank’s approval of the short sale and request proof that the seller has provided the appropriate paperwork needed for the process.

You can try to include an expiration date on the offer, but the bank will probably not pay attention to the expiration date and the offer will expire.

Frustrated with the way your purchase of a short sale is happening? Can you do anything about it?

Unfortunately as the buyer, you will not be able to contact the bank to retrieve any information. The loss mitigation department of the short selling bank will not communicate with the buyer or the buyer’s agent. Only the seller’s agent, who has permission to speak on behalf of the seller, can speak to the bank.

If you are looking to purchase a short sale property, make sure to ask the owner if they’ve completed their hardship letter including the short sale package which is to be sent back to the lender for approval with the purchase offer.