The Short Sale Process

A short sale is when a property is sold for less than what the homeowner owes on their mortgage balance. In a short sale, the seller’s agent is responsible for listing the property and collecting the “financial hardship package”. A hardship package includes bank statements, loan information, and a hardship letter explaining why the homeowner had to sell the property. When a buyer is ready to submit an offer, the agent starts the negotiation process by submitting the offer along with the hardship package to the mortgage lender.

One of the biggest challenges in a short sale is getting multiple lenders to participate. Even though the junior lien holders would get wiped out if the home were to be foreclosed on, they often require monetary contributions to release the lien. Getting all parties to agree to the short sale can lengthen the short sale transaction process.

How long do short sales take to buy?

You have probably heard horror stories of buyers waiting over six months to find out if their offer on a short sale is accepted, and then getting a counter-offer at a price much higher than they can afford to pay. While a rare handful of lenders can accept short sale offers within a month or two, acceptance can typically take four to six months, or even longer. Something that can extend the process is when there are junior lien holders. Each holder will typically have their own Broker’s Price Opinion (BPO) done at the property before they accept the offer.

When viewing properties, find out if the short sale has been approved or not. Approved short sales are those where the lender has already agreed to take a specific sale price. Short sales that have not yet been approved take the longest. Good communication from your agent can make this anxious time period go by faster. Don’t forget that just because you have an offer pending on a short sale, does not mean that you have to stop looking at homes.

Is a short sale a good deal?

Is it possible to save money by buying a short sale? Absolutely—but not every short sale is automatically a deal. Make sure your agent provides you with recent comparables (statistics of active, pending and most importantly recently sold homes in the area with similar characteristics). Just because the seller is not getting any money out of the sale does not mean they will automatically accept your offer. Keep in mind bidding wars can happen before the listing agent submits the highest and best offer to the lender.

How do you ensure that your offer will get accepted over others? There’s no one winning formula, and it is not always about the highest price. The financing and terms are also taken into account when accepting an offer. An important point to consider is the junior lien holders may require the buyer to come in with extra cash to release the liens.

Here is an example, the listing agent markets a property at $200,000 based on comparables.  The lender in 1st position may accept a purchase price of $205,000, but the lender in 2nd position may require an additional $6,000 to release the lien. Buying a short sale where the owner only had one loan is generally going to save you time and money, but in certain markets, those are far and few between.

“As Is” Condition

If you are planning to purchase a short sale, do not expect any repairs to be made. Lenders typically won’t pay to repair anything such as cracked slabs, broken windows, or leaky roofs. Though they may pay for termite fumigation when necessary, they will not pay for any cosmetic repairs or concessions. Don’t put an offer in on a short sale that clearly needs work if you don’t have the skills to do the work yourself or the money to hire someone to do it right.

How to bid on a short sale

If you are comfortable with the prospect of buying a short sale your first step is to get mortgage pre-approval. When you are seeking pre-approval ask your lender if they will finance a short sale and if there are additional requirements to qualify for a short sale.

One financing has been assured, go ahead and submit an offer with your agent. Be sure to read all the paperwork that you submit as well as all the lender’s terms and conditions. If you have questions about any of the paperwork, ask your agent or lender. Do not sign anything you do not understand!

Once you submit an offer, be prepared to wait and wait and wait. With any luck, you’ll have an acceptance from the lender or lenders just before you start to forget that you made the offer in the first place!