Like other misnomers out there, a “short sale” is often anything but. A short sale is a way for a homeowner who owes more on their property than it is worth to sell their house and avoid foreclosure while appeasing all of their lenders — think “coming up short” rather than “a short walk around the block.”
As a buyer, this means you’ll have to work with the seller and the seller’s lenders to negotiate the sale, which will take time (imagine trying to get children at a party to agree on how to fairly split a small cake which, no matter how it’s split, will leave them all unsatisfied). Additionally, the property itself will come “as is,” meaning you will most likely need to spend time and money on renovations and repairs after the purchase before moving in.
Patience and persistence in a short sale have their rewards and can save you money in the long run — the process is simply more of a marathon than a sprint. To make sure you know what you’re getting in for, and to help guide you along your way, we’ve compiled a list of 13 essential steps in the short sale buying process.
1. Hire an agent who knows what they are doing
When you know you are going to start looking seriously at short sales, it is paramount, as ever, to find the right agent.
Glen Henderson, one of the top agents in San Diego, California, ran one of the top three short-sale negotiation groups in San Diego during the last financial crisis. Henderson explains that while there is special training for agents interested in working with short sales (the National Association of Realtors offers a short sale certification), the most important qualification an agent can have is a proven track record in the often complex and time-sucking process of short sales.
2. Get preapproved
Getting preapproved (different than pre-qualification!) for a mortgage can be one of those checklist items that falls to the wayside, but don’t allow yourself to forget about it — especially when you’re pursuing a short sale.
Make sure to communicate with your lender about the fact that you are looking into a short sale. Because short sales often occur on a lengthy timeline, you’ll want to find a lender who is flexible with how long your mortgage application is valid.
It is possible that you will be able secure a mortgage through the current homeowner’s lender or bank (and you’ll be working with them, anyway, to negotiate the sale) — but you’ll be wise to do some comparison shopping for a mortgage! Luckily, preapproval can happen very quickly if you follow some basic steps.
3. Find a short sale house for sale
OK, you know you want one — now, how do you find them?
To start with, some homes are simply listed as “short sale,” in which case your job as a housing sleuth is easy! In other cases, listings might have language that tips you off to the fact that this is a short sale. Keep an eye out for phrases like “subject to bank approval” or “give the bank time to respond.”
You can also look for homes that are in default or pre-foreclosure; these can be listed online or in legal ads. Your real estate agent will be able to search the multiple listing service or MLS (only available to real estate agents) to help you find homes that are in pre-foreclosure. Agents can also help you identify homes where the current owner doesn’t have much equity in the house — the less equity the owner has, the more likely their lenders are to be interested in a short sale.
4. Contextualize the neighborhood
Context, context, context! Although it’s great to get a house for a lower price (especially if price is one of your main deciding factors), it’s equally important to know the context of your home in the greater neighborhood. This will help you to make educated decisions about its likely appreciation or depreciation over time.
What are the home price trends in the neighborhood? Has the neighborhood weathered previous economic storms? If yes, then it’s more likely to do so again, making the home a safer investment. If you are planning on renovating and reselling the property, it can also be beneficial to think about what month is the best for re-selling the home.
5. Take a tour with an eye on the bones
Touring a short-sale property is simply not going to be as aesthetically pleasing or soothing as a house tour on the regular market. It is unlikely that the seller will stage the house, so there will likely be cosmetic issues… and, ahem, “personal” decor choices — not to mention clutter.
While touring, try to focus on issues that would require major structural repair, like pests, obvious moisture or dampness, and faulty electrical connections. Remember, you’re trying to get a feel for how much of a construction project the house will be — walk in the door knowing that you are not touring a perfectly lit and landscaped dream home.
6. How much is the house worth?
Before putting an offer on the house, you’ll need to determine how much it is worth — and how much the current homeowner still owes on it.
The best way to determine the market value of the house is to pay for a professional appraisal. You can ask the current owner directly, or use tax records or other publicly available records to find out how much the seller owes.
7. Contact the lender
Again, because this is a short sale, you not only have to work with the seller, but with the seller’s lenders, as well! Your agent should guide you in getting an authorization letter from the homeowner that will legally allow for the lender to talk with you and your agent about the property. You will need to get this letter notarized before approaching the lender.
It is also advised that you and your agent get the name and phone number of someone in the lender’s loss mitigation or resource recovery department — both to get a feeling for what the lender’s requirements are for a successful short sale, and so you have a personal contact to follow up with throughout the approval process.
8. Get an inspection
In a short sale, you’re getting exactly what you see, which means in most cases, you won’t be able to ask the seller for additional fixes or updates to the property before you buy.
Getting a thorough and clear home inspection is really important — it will tell you what major and minor repairs are in store so that you can accurately calculate whether owning and updating the house to a safe living standard are within your budget. Get a home inspection, and make sure you do it right.
9. Do the title research (and get title insurance)
Once the purchase of the property is completed, you will be responsible for any liens on the house. This is fine if you know about all the liens and can figure them into your financial plan for the property. This is less fine if there are any undisclosed liens on the house that come to light after the sale.
A title search will ensure that you know about all liens, plan for them, and don’t get surprised after closing. Remember: Even if you don’t know a lien exists, you will be legally responsible for it once you own the property. Even if they’re not trying to trick you, sellers might not fully understand what liens are active on the house, or that they are withholding information that they should disclose.
Getting title insurance is a great way to protect yourself against undisclosed liens and other nasty surprises. Title insurance will cover any legal costs to protect your home and your investment against undisclosed liens.
10. Get your application together
It’s finally time to get your application together! While the right agent should take the lead on this process, it’s good to be prepared by knowing what will be in the application.
Some things on this list are pretty straightforward: you’ll need to provide an appraisal, a list of any liens on the property, and a copy of an earnest money cashier’s check. You will need to provide a package from the seller, too, which includes a hardship letter and financial information. If the house was listed on the market, you will also need to include a listing agreement.
Finally, you will need to provide a purchase offer written by your agent. This should include language that allows you to get out of the sale if you find another, better deal while you are waiting to hear back on your offer.
If you are submitting the offer before getting a full home inspection (which is common), make sure your agent includes a contingency that will let you out of the agreement if serious issues are found during the home inspection.
11. Don’t sign anything you don’t understand!
Like cautionary tales of fine-print-skimming everywhere, signing a short sale agreement without reading and understanding it fully won’t end well for you — make sure you understand what you’re signing on to.
A good agent will be able to walk you through the process and the contract, but don’t be afraid to ask what might seem like stupid questions along the way. Better “stupid” questions now then surpise pitfalls later!
12. Accept, reject, or counter-offer — or, worse, silence!
Now that you’ve submitted your offer it’s time to hurry up and… wait.
Waiting can end in hearing back from the bank that they will be accepting, rejecting, or making a counter-offer. However, waiting could also end in more waiting and, ultimately — silence.
Banks reject short sale applications for a number of reasons. Even if you and your agent are checking in regularly with the bank, it can be hard to tell when to keep waiting. The best advice is to be prepared in the case of silence or rejection without losing hope entirely.
13. KEEP LOOKING
A watched pot never boils, and a short sale house application may be met with unresolved silence — hopefully this isn’t the case and you are able to get the keys, pop the champagne, and get to work on those home repairs!
But either way, some of the best advice we can give you is simply this: Keep looking! The more homes you have in play — the better chance you have of making an offer on a short sale property that is accepted.
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