What You Need to Know When Making an Offer on a Short Sale?

As a buyer in today’s market, it seems as though every property you view is distressed in some way. REOs (short for Real Estate Owned - also known as bank-owned properties) and short sales dominate the local market in many areas. Not only that, you hear from a variety of sources that you can get an incredible deal on these distressed properties. While in some cases this may be true, it is also important to be realistic and buy a home before prices begin to rise again, which they have already begun to do in the lower price range (<500K).

There are two main types of distressed properties: short sales and bank-owned properties. Short sales are homes being sold for below what the current seller owes on the property and the seller is unable to make up the difference at close of escrow. Many home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, and declining home values in a slower real estate market.

A short sale is different from an REO property, which is when the seller's lender has taken title of the home (usually through foreclosure) and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. It is important to understand the risks before you pursue a short-sale purchase.

You're a good candidate for a short-sale purchase if:

·         Patience is a virtue… especially in a short sale transaction. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lenders must approve the sale before you can close on the sale. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.

·         Financing. Lenders like cash offers. But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. If you're preapproved, have a large down payment, and are able to close at any time, your offer will be viewed more favorably than that of a buyer with less secure financing.

·         The Terms: Don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property—or you need to be in your new home by a certain time—a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.

If you are interested in a short sale listing, for the best chance of a successful short sale:

·         A qualified real estate professional. You may have a close friend or relative in real estate, but if that person doesn’t know anything about short sales, he or she may hurt your chances of a successful closing. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. Perhaps more importantly, an experienced real estate professional will be able to evaluate the particulars of each specific short sale listing to evaluate which are wastes of time, and which listings have the best chance of approval.

·         Title officer. It’s a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic’s lien, homeowners association lien, etc.), it's much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you’ve waited for months for lender approval. If you don’t know a title officer, your real estate attorney or real estate professional should be able to recommend a few.

Other risks faced by buyers of short-sale properties include:

·         Rejection… always hurts, especially when you’ve invested months. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Sometimes, the lender will make a counteroffer, which will lengthen the process even further.

·         Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you.

·         No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits.

The risks of a short sale are considerable. But if you have the time, patience, and iron will to see it through, a short sale can be a win-win for you and the sellers.