As bad as the housing bubble was, the one good thing that came out of it was that lenders across the country had to tighten up their processes regarding short sales. With so many people seeking help from homes being under water it has become infinitely easier for sellers to seek reprieve, which also makes it easier to purchase a home at a discount. Here are some tips to acquiring a short sale home.
Keep your eyes wide open
There are many ways you can find a short sale property. You can have a Realtor give you an alert when new short sale properties come on the market in areas you are interested in. You can create your own alerts using popular real estate web sites such as Zillow and Trulia. My favorite is the tried and true “word of mouth” method. Talking to friends, neighbors and others you may be able to hear about homes before they even hit the market.
Know what you are getting into.
Short sales take a long time to close and may require extra effort on the part of the buyer. Walking blindly into a short sale can be a losing and distressing proposition, so push for disclosure before you get involved.
A short sale is not a DIY project. Having a real estate agent who knows how short sales work and who has negotiated others will increase the chances of closing the deal. Plus they have the expertise to sniff out “bum deals” to help you not waste time making offers on homes that are so early in the short sale process that there is no room for price negotiations.
Be Prepared to Fit It Up…A Lot
Sellers in financial distress have a higher chance of their home being in some state of disrepair. The seller also may be reluctant to reveal serious maintenance issues for fear of having offers rejected. Do your due diligence and get professional written quotes on what it would take to make the home exactly as you want it. Add that number to the price of the home to get what you REALLY are paying for the house.
Make sure the deal has a prayer of closing
If you’ve decided to go for it, the first step is to have your real estate agent talk to the real estate agent representing the seller and determine the status of the short sale. Below are items that most lenders require from a short seller. If the seller is unable or unwilling to provide this information, the short sale won’t close and any buyer is wasting his or her time. Your real estate agent should push for candor from the seller’s agent.
- A hardship letter. The seller must explain why he or she cannot continue making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won’t be approved, but a seller with cancer, no job and an empty bank account may.
- Proof of income and assets. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. This package of information must include income tax and bank statements, going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that’s the case, this deal is unlikely to close.
- Comparative market analysis. This document shows that the price of the property has declined and that the property won’t sell anytime soon for the amount owed. This packet of information should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. This packet of information is similar to what’s known as a Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller’s contention that the property is worth no more than the short-sale price.
The bottom line: Don’t choose a short sale if you’re in a hurry. It is going to take time (and a good dose of patience), however the sometime tens of thousands of dollars you save will be well worth the headache.
Part of what slows down short sales is buyers’ insistence on making really lowball offers, she says. “You get really crazy, ridiculously low offers — and they are rejected.” It’s OK to put in a really low offer however, if you can show the bank actual quotes from multiple contractors showing how much work the home may need. In short, be realistic. Not greedy.
Shorten the Negotiation Process
How can a potential short-sale buyer be protected from getting involved in an extended negotiation that doesn’t go anywhere in the end? Try negotiating an agreement with the seller and the seller’s real estate agent that your offer will be the only one presented to the lender. If the lender isn’t flooded with offers, it will be more motivated to move forward. If the lender turns down the offer without countering, then the restriction disappears.
Make Sure Your Money Isn’t Funny
As is true with any of these types of transactions — REOs, short sales, foreclosure auctions — make sure you have money lined up. Cash is the best financing alternative in these cases, however if you are approved (not pre-approved) by a lender this may also work. Just make sure that your lender will lend you money if the home is in disrepair. They may require a hefty down payment or for you to show proof that you have escrowed enough money to cover the full amount of the property rehab.