It might be intimidating to go through the short sale process, but with the right knowledge you can navigate your purchasing decision with confidence.
While many have found profitable margins many use this strategy to make a profit, others have also fallen into unexpected situations where equity, the home, or both, are lost, delayed or held for uncertain amounts of time. Added knowledge and understanding of the intricacies and nuances of the short sale process can help save time, money and stress to the buyer.
Understanding a Short Sale
So what is a short sale? A short sale occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner's mortgage lender(s) agrees to the "short" payoff. A lender might accept a short sale with the property worth less than the balance of the mortgage, if the borrower cannot continue to make the monthly loan payment or does not have enough money to pay back the full balance of the loan and needs to move out of the property.
Short sales come with benefits for both the home seller and buyer. Homeowners can avoid the negative credit impact that can come with a foreclosure and a buyer has an opportunity to purchase property at a fair market value.
Other parties, such as the seller’s mortgage lender can mitigate losses by avoiding the process of foreclosing and reselling the property.
Do Your Research
Checking public records is the first and foremost item on this list before making an offer to purchase. When determining how much to offer a buyer, check whether a foreclosure notice has been filed and how much is still owed to the lenders. Despite it being a short sale, banks are not under pressure to accept an offer on a short sale, so offers need to be reasonable.
If a home you are interested in purchasing has multiple loans associated with it, it can cause problems during the short sale process. The first mortgage lender’s position is protected by the second, so if the second does not want to foreclose, it could leave a buyer with unmet expectations. For example, if a seller owes $200,000 on their first mortgage and $50,000 on the second, offering the $200,000 leaves nothing for the secondary $50,000 loan. The first lender does have to provide an amount to the second to gain agreement however, it is often less than one would expect. Make sure you are researching all aspects of the sale before getting too far in the process.
Hire an Experienced Agent
Before hiring an agent, check if they have experience with short sales. This will help you anticipate and manage unexpected problems from occurring. Short sale experience in an agent can also expedite the transaction and protect the buyer’s interest where attention to detail is necessary.
Failure to work with an agent with short sale experience can result in missing deadlines, increased prices and fees, falling into fraudulent practices or schemes and/or a longer than normal process especially if the buyer is not prepared with the proper paperwork.
Often, after the seller accepts an offer, the lender will want a copy of the earnest money deposit and proof of funds. In addition to this, the lender will want to see that the buyer is prepared with their own loan and are pre-approved. An experienced agent can provide an aggregated list of comparable sales that support the offer the buyer has made on the home.
Understand the Timelines of the Short Sale Lender
Short sale lenders submit short sales to a committee but decisions can take anywhere from two weeks to three months. As a buyer, patience will be key as neither the buyer nor the buyer’s agent are allowed to contact the lender. The listing agent will have the contact information for the lender but make sure the offer provided by the buy is contingent upon the lender’s acceptance. A helpful tip is to request the lender’s response within a reasonable given time period.
The commission structure for short sales can also vary from a traditional home sale, as the lender is the entity approving commission. A lender can negotiate the commission with the listing broker, directly, who then shares with the buyer’s agent. A buyer may be left with unexpected costs if it’s not clear as to how the commission is structured.
Of course, each short sale is situational and can come with its own unique set of challenges and benefits. Purchasing a short sale can be complicated and unpredictable but with knowledge and the right team by your side, short sales can be a profitable acquisition.
Brightline Title offers nationwide title, escrow and settlement services with a focus on security and compliance and a commitment to local, personalized service. With unparalleled expertise and industry-leading technology, Brightline is well-equipped to meet the needs of a dynamic client base in an evolving market. Contact our team today.
