It’s a seller’s market right now. Demand is high and inventory is low, and as a result, housing prices jumped 7.1{f5b803b3ff349ad072c7061546ce6e083822d9eb1c075da9c628d64f032e5ca9} in the last year.
But what does that mean if you’re looking to buy? Short sales may be an option for you.
We’ll explain everything you need to know about short sales and give you 10 tips if you’re looking to buy a short sale home.
What is a Short Sale?
A common misconception is that a short sale means that the process will be quick. That couldn’t be farther from the truth.
The “short” refers to the amount the lender is getting in a sale, not the time it takes for the transaction to go through. A short sale can take a lot longer than a regular sale.
A short sale is when a house sells for less than the borrower/owner owes on the mortgage. The homeowner runs into financial issues and may have fallen behind in payments. They can’t pay one lump sum to the lender to catch up.
If they sold the house there isn’t enough equity to pay the balance owed, so the lender agrees to a short sale.
What is the Process of a Short Sale?
It’s a lengthy process but the owner will avoid foreclosure and the lender gets more through a short sale than if the property went to auction. The lender, or lenders if there’s a second mortgage on the home, will avoid court costs and legal fees.
In most cases, the house needs a lot of TLC since the owner is in financial peril and hasn’t made repairs or updates. The lender avoids the headache of hiring a contractor and paying a lot of money to get the house back to fair market value.
A caveat to a short sale is the selling price. In a nutshell, it’s on the table. The listing price won’t be as much as the amount owed but close to market value.
The first step is the borrower prepares a short sale package. This includes:
- Complete listing contract with an agent
- Letter of authorization that the agent can speak to the lender
- Hardship letter from the seller
- Seller’s complete financial statement
- Tax returns for the past two years
- W-2’s for the last two years
- Payroll stubs for the last 30 days
- Bank statements for the last two months
- List of recent comparable sales in the area/market analysis
- Preliminary closing statement
A lender approves a short sale in as little as 14 days up to 120 days. Agents who specialize in short sales have an idea how long the approval process takes when dealing with certain lenders. Ask them their thoughts on the time frame.
What Does a Short Sale Mean for the Buyer?
There are benefits for buyers looking at short sale homes. The first is that there won’t be a lot of competition. Buyers want the process over with sooner rather than later and in a short sale, you can bank on the later happening.
There are drawbacks if you’re looking at short sales, too. For instance, the list price plays a big part. If you make an offer and the lender rejects the short sale, you’re out of luck.
How Long Does a Short Sale Take?
As we mentioned already, the length of the short sale depends on the lender’s approval. That could take weeks or months.
You still go through inspections and a closing process after approval. It could take seven months for the entire process. It could take up to a year or more.
Buying a Short Sale with an FHA Loan – Can I do It?
Yes, but you want a lender to prequalify you first and HUD has to approve the lender for FHA programs. Your agent and/or bank representative provides all the details for the process.
Like a regular sale, an FHA inspector appraises the property to ensure it meets the FHA guidelines. The short sale home could be in bad shape. Don’t panic!
The FHA has the 203(k) Rehabilitation program for this situation. It allows a buyer to borrow money for the sale of the property and money for the rehab combined in one loan. It goes through the same steps with an extra one for re-appraisal and an escrow repair account to draw funds.
10 Tips for Buying a Short Sale Home
After you decide buying a short sale home is for you, there are important things to keep in mind.
1. Find an Agent Who Deals in Short Sales
Finding a real estate agent that knows the ins and outs of short sales is key to the process going as smooth as possible.
Find an agent who’s familiar with the steps and paperwork. Research an agent’s track record before you go into a deal. Your agent can’t talk to the lender so you need to trust them.
2. Be Wary of More Than One Lender
If the seller has two lenders, it will make the process take longer. The short sale may not even get approved.
Talk to your real estate agent about these concerns. If they have experience with short sales, they’ll suggest you either walk away or stick it out, depending on the situation.
3. Don’t Low-Ball Your Offer
You have to keep in mind that the financial institution that holds the mortgage doesn’t know about the price of the short sale. They find out after you and the seller work everything out. If you low-ball your offer, the mortgage holder could reject the short sale altogether.
You’re motivated to buy. The seller’s motivated to sell. The bank isn’t motivated at all.
They know something’s coming down the pipe, like a foreclosure, but they still want to get as much out of it as they can. This is why comps are important. Your agent will have the recent comparable sale prices of the area and will guide you to a respectable offer.
If your offer is good, it still may take a while to get approved. So, don’t put in a “high” offer thinking it will speed up the approval process.
4. Get Prequalified
Many buyers get pre-approved for loans these days. In a short sale, this is a benefit.
There’s a lot of paperwork and waiting involved. Knowing how much you have for the down payment and how much you’re financing won’t cause delays on your end at least.
5. Don’t Fall in Love with a Bad House
You know there’s a possibility the house is in bad shape and may need extensive work. Visit the property before making an offer, don’t go off the list price and get too excited.
You buy a short sale house as is. Are you willing to go through a remodel/rehab? If not, cut your losses.
If you’re okay with a rehab, factor in estimated repair costs. When it’s all said and done, you don’t want to owe too more than the house is worth.
In other words, if you buy a house for $100,000 and you estimate $75,000 for repairs that’s $175,000 (plus interest) you’re putting into it. If the comps are at $150,000, you won’t sell it for what you owe.
6. Keep Looking
Don’t settle! If you enter into a short sale, keep looking.
Check the wording of your contract. If you find another house you want to put an offer on, make sure you can cancel the short sale contract.
7. Find an “Approved Short Sale”
An “approved short sale” means the seller’s lender has already approved a selling price.
It’s common for a short sale home to have several interested parties. If the lender approves a contract but the buyer cancels, the price remains. It’s straightforward for you and the seller.
Buyers love these types of short sales but they’re hard to find.
8. Don’t Skip the Home Inspection
Get a home inspection. Ask family and friends for recommendations and research any suggestions online. It will cost between $300-400 but it will be worth it.
More so, show up to the inspection! The more you know the better off you’ll be. Ask the inspector specific questions and get everything explained to you in detail.
When the inspector notes an issue, ask for a repair estimate or research later if he can’t give you one. You will have a window to get the inspection done so make sure you get it done in the allotted time.
9. You Must Close on Time
Closing on time is a must in a short sale. That means it’s important you have all your paperwork, your loan is good to go, and you resolved all issues. If possible, get these ducks lined up a few days before the closing date.
If you’re running behind, request an extension as soon as you sense there’s a problem. The more time you give the bank, the more likely they will grant your extension.
10. Be Patient
Buyers back out of short sale homes because it’s a long process. But now you know how long it can be!
If you’re hooked on a particle short sale home, don’t let all the work you put into it go to waste out of frustration. Be patient.
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