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What You Should Know About Short Sales

If you’re willing to invest in a short sale, it may actually be a tremendous bargain. There are pros and cons involved with short sales, but if you take the right steps you may end up with a heavily discounted price tag. And, because the lender is usually eager to get their money back – they may also offer favorable financing terms.

Of course – as with all things you may be unfamiliar with – properly researching the way short sales work is vital to the process. To wit, one of the first things you need to know is that despite its name, a short sale can be a long and tedious process. In fact, there may be so much waiting involved that the buyer ends up walking away from the deal. So, patience is a necessary component if you’re going to undertake this type of transaction.

Why do short sales take so long?

Essentially, as the buyer you have to wait for the bank’s approval. The seller may have accepted your offer, but the bank may not agree to the price – and they’re the ones holding the note.

Here are the components being reviewed while you’re waiting:

Short sale package: Before anyone will even take the process seriously, the seller has to prove financial hardship. This is done by their submitting a package to the lender which includes financial statements, letters describing the hardship, and financial records.

Offer: As soon as an offer is accepted, the listing agent will send the mortgage holder their listing agreement, the fully signed purchase offer, the buyer’s preapproval letter or proof of funds for a cash offer, a photocopy of the earnest money payment, and the short sale package. If anything is missing, the process will be delayed even longer.

Bank processing: Finally, the bank may take anywhere from weeks to months in their review of the paperwork before giving you an approval or denial. Remember, if the note holder thinks they can make more money by foreclosing on the property than by proceeding with a short sale, the offer may be rejected.

What are the best steps to a short sale?

Now that you know what’s going on behind the scene, and you’ve decided to go ahead with the process, there’s more to learn about achieving short sale success:

1. Find yourself an agent who specializes in short sale properties. Alternatively, you could find listings on an MLS website yourself – often identified by “subject to bank approval” or “give the bank time to respond.” However, short sales can be tricky even for seasoned agents, so sticking with a Realtor may be in your best interest.

2. Determine the direction you will take with the property. If you have plans to flip or resell the property immediately, you need to be aware of the terms and conditions of the short sale approval letter. Certain servicers place limitations on their approval which may impact an investor’s intention to immediately resell the property for a profit.

Alternatively, if you intend to hold on to the property as a rental, you also need to know that those same mortgage servicers may have specific stipulations to follow. Some terms may indicate that you cannot rent the property back to the seller, even to the point of requiring affidavits be signed by all parties to the sale, verifying that a rent back will not happen.

3. Know the numbers for your short sale purchase. The ideal scenario would be to be able to buy the property, renovate as needed, then sell or rent it to make a profit. You’ll need to know: the purchase price, the cost of repairs and renovations, the after repair value (AVR) – an estimate of the property’s fair market value after repairs – and the carrying costs (your expenses for holding on to the property). These holding expenses may include mortgage payments, property taxes, insurance and any utilities.

4. Final steps before you make an offer. Research whether there are any liens against the property; aside from a first mortgage there may be mechanic’s liens or secondary notes. Next, complete the short sale application, and assemble the proposal.

You should know that it is not uncommon for a lender or bank to either reject your offer or come back with a counteroffer, so negotiating is to be expected. Be patient throughout the entire process – remember you can’t rush or control anything – and you just may come out on top with profitable short sale purchase at a huge discount.