How To Buy A Short-Sale Home: The Process For Buyers
Although the steps involved in a short-sale process are very similar to the ones in a traditional deal, the short-sale process is more complicated because of the lender’s involvement. The typical home buying journey merely requires the seller to transfer their property to the buyer in exchange for the agreed-upon purchasing price.
However, in a short sale, the transaction is in the hands of the lender, so everything tends to be more time-consuming and convoluted. Next up is a breakdown of how a short sale works.
1. Get Approved For Financing
With any short-sale home purchase, the first step is getting approved. While it’s always beneficial for buyers to obtain an initial approval before making an offer, it’s even more important in a short sale. That’s because the lender will want to ensure the new buyer is capable of purchasing the short-sale property.
2. Pair With A Real Estate Agent And Find A Home
Finding any home can take time, but it’s more challenging when your heart is set on scoring a short sale. Instead of searching through all the listings available in your desired area, focus on preforeclosure property listings online. You can also search through public records by contacting the local county court.
Identifying and navigating a short sale can be tricky, but an experienced real estate agent can help you. They can assist with and explain all aspects of the home buying process, which includes locating short sales.
3. Do Your Research
You’ll want to begin by reviewing comparable sales in the area to find out the value of the home. Real estate agents are an excellent resource for determining home value because they have access to the multiple listing service (MLS), which provides information on the prices of homes currently on the market and recently-sold homes.
Since short sales are transactions in which the homeowner owes more on the home than it’s worth, you’ll want to find out exactly how much the homeowner owes the lender. Before you purchase a short sale, you must make sure you know of every person or entity with a claim on the property (these are called lienholders.).
You can ask the homeowner, their agent or lender for this information. However, to be safe, you should also ask a title company to do a title search on the property.
4. Make An Offer
When making an offer on the property, you must use your knowledge of local home values to consider what the lender will think of your offer. You might be looking at the short sale as a way to get a deal on the home, but keep in mind that the lender is still trying to recoup as much of the remaining mortgage balance as possible – and likely also must meet investor guidelines to accept the offer. Your offer should be close to the market value of the home if you want it to be accepted.
When you’re looking at properties, beware of fraudulent activity. If the seller asks you to pay money under the table for the opportunity to apply for a short sale, refuse and report it.
5. Have The Home Inspected
Short-sale properties are sold “as is,” meaning you won’t be able to negotiate a lower purchase price if the property has issues. However, you should still know the condition of the home you’re buying before you decide to close on it. While the seller is required to disclose any known defects, this type of information can fall through the cracks.
Be sure to get a home inspection so you know what you’re getting into. If repairs are needed, research the cost or get estimates so you can find out if the home will make financial sense for you in the long run.
6. Close On The Property
Assuming the approval letter and documentation are in order, you’ll be able to close on the property, receive the keys and move in. By this stage, things should proceed normally because the lender has already done all the legwork on your offer.
Benefits Of A Short Sale In Real Estate
A short sale can be beneficial for all parties involved. It provides greater investment opportunities for buyers and minimizes the financial repercussions that both the lender and seller would face if the property went into foreclosure.
Let’s take a closer look at the benefits for both buyers and sellers.
Short-Sale Benefits For Buyers
Short-sale homes provide buyers with several advantages, which we’ll explore momentarily.
May Be Less Expensive
Although the short sale property will be priced according to market value, the lender is highly motivated to sell to cut the bank’s losses. As a result, buyers can often get a better deal on the home than they would if they purchased it in typical fashion.
A Less Competitive Market
Given the lender’s entanglement in the deal, short sales are far more complicated than traditional sales. Since most buyers aren’t experienced in short sales, they tend to shy away from them.
There’s less competition and a better chance to make an offer and get it accepted when fewer buyers are interested.
Less Risk
Buying a short-sale home could potentially be less risky than buying a foreclosed home. If you buy a short-sale home, you have an idea of what you’re getting yourself into, especially if you request a home inspection. When you buy a foreclosed home, banks aren’t required to disclose information about the home. As a result, you could later have to deal with issues you aren’t presently aware of.
Short-Sale Benefits For Sellers
How exactly do sellers stand to benefit from a short sale? Here’s how.
Foreclosure Prevention And Fewer Fees
In a typical sale, the seller pays the agents’ commission fees. However, in a short sale, the lender pays these fees. A short sale will also prevent a seller’s home from going into foreclosure. Foreclosure can have a more detrimental impact on the seller’s credit score.
Debt Absorption And Forgiveness
The short-sale home buyer will pay off much of the seller’s debt. And, it’s possible that the lender will accept the proceeds from the short sale and write off the remaining debt as a loss if there’s no equity to cover the payoff. In these cases, the seller may not be responsible for paying off whatever debt remains after the short sale.
Housing Market Reentry
Under the right circ*mstances, a short sale enables the seller to reenter the market and obtain a mortgage with a Federal Housing Administration (FHA) loan. To do this, you must have no late mortgage or other installment loan payments in the year leading up to the short sale. The same is true for the year leading up to applying for the new mortgage.
Drawbacks Of A Short Sale In Real Estate
Despite the benefits involved, a short sale can be problematic. The process is complex and drawn out, which can make the transaction riskier and have a negative impact on the finances of buyers, sellers and lenders.
What are some examples of this impact? Let’s delve a bit deeper.
Short-Sale Drawbacks For Buyers
If you’re a buyer looking to obtain a short-sale home, be sure you understand some of the drawbacks discussed in detail below.
More Time
A short sale usually takes longer than a traditional sale because of the lender’s involvement. In an attempt to recoup as much money as possible, the primary lender and any junior lienholders in the mix will take their time negotiating and closing the deal. Remember, the more lienholders involved, the longer the process will take.
Keep in mind: A seller will sometimes delay the sale because they either second-guess their decision or don’t have the necessary paperwork.
Increased Risk
Since short sales are sold “as is” without typical disclosures, such as a Seller’s Disclosure, the condition of the home and the quality of the deal aren’t always clear to the buyer. Moreover, there’s no guarantee the deal will close, so the buyer may risk spending time and money on a home they’re unable to ultimately purchase.
More Homework
A short sale requires the buyer to put in a lot more work upfront. Doing research to figure out the true value of the home, discovering all liens on the property and identifying any issues with the property’s condition are essential to determining whether the purchase is worthwhile.
Property Condition
Given that those who part with their home via short sale are financially strapped, short-sale properties tend to be in worse condition than the average home on the market. As a result, the buyer often has to spend a lot more money on repairs and improvements.
Short-Sale Drawbacks For Sellers
Although a short sale on real estate offers multiple benefits to the seller, it also comes with the drawbacks – both real and potential – detailed next.
No Negotiation Power And The Absence Of A Profit
Although a seller plays an active role in the sale of the property, they won’t have the power to negotiate the purchasing price of the home.
Since a seller owes money to the lender in excess of the market value, they likely won’t receive any of the proceeds from the home sale.
Credit Score Damage
A short sale can do real damage to a seller’s credit score. The higher your credit score, the larger the hit. However, a short sale tends to cause a seller’s credit score to drop by fewer points than it would drop with a foreclosure.
Delays In Obtaining Another Mortgage
After a short sale, a seller typically must complete a waiting period before qualifying for a new mortgage. Outside of an FHA loan, the waiting period may be anywhere from 2 – 7 years.
A Deficiency Judgment
In some circ*mstances, the lender can sue the seller in an attempt to retrieve the remaining debt after the short sale. If a seller is sued, their credit score will receive a blow similar to the blow it would receive with a foreclosure. Deficiency judgments aren’t legal in all states, however, so you may not need to worry about this.
