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How To Buy A Short Sale – Things To Know Before You Start

By | April 12, 2010

In my previous article, I talked about what a short sale is and why a bank would accept one. Now I’d like to get a little more in-depth and show you how to successfully buy a short sale.

What You Should Know Before You Start

First of all, let me say that short sales have come a long way.  There was a time when banks were very hesitant to accept short sale offers and, as such, they were pretty unreasonable about the whole deal (wouldn’t you be, if it was you who was losing millions of dollars to bad debts?)

These days, acceptance rates are way up and processing time at the banks is way down.  Lenders, sellers, and buyers alike have embraced the short sale as a legitimate way to do business.

It can still take a while.

Depending on who the bank is, the number of banks who are owed money, and the borrower’s personal financial situation, expect to wait 3-5 months for a response from the bank BEFORE the regular clauses of the contract kick in (those are the mortgage, the inspection, and the title clauses.)  The bank needs to size up the specific situation, get a feel for the value of the property, determine the eligibility of the borrower for a short sale (if the seller has tons of liquid assets, the banks might hold them to their note) and exhaust all their options to try and get the highest payment for themselves that they can.

You have a contract with the seller, not with the bank.

Short sale contracts are regular real estate contracts.  Yep, you read that correctly – they’re absolutely normal in every way.  Like every other real estate contract, there are certain contingencies that must be met for the contract to be finalized: the inspections have to be done to the buyer’s satisfaction, the financing has to go through, and the seller has to provide clear title to the buyer.  Short sales just add another contingency – bank approval.

Banks aren’t bound to accept your contract.  They don’t have to accept your terms, they don’t have to accept your price, and they don’t have to accept you. If you have a solid offer, they still probably will – after all, banks can’t sell it over market value anyway, and they certainly don’t want to spend money they’re already losing  just to maintain a property they own through foreclosure.  If they can turn a profit (or reduced loss) through a short sale they’re likely to accept – but don’t be surprised if your lowball offer gets turned down outright.

The seller’s mistakes don’t follow the property.

I’ve talked to tons of buyers about short sales, and to a one they’re concerned about the liens on the property – the mortgage, the equity line, the delinquent HOA fees.  They don’t want to pay them after closing and they should never have to.

Most standard real estate contracts require the buyer receive clear title to a property.  That means that banks have to either accept an agreed-upon price minus any other liens that they will have to pay (including back taxes and real estate commissions) or foreclose on the property, pay the liens anyway, and then try to sell it.

Also, title is easier to convey if the property hasn’t been foreclosed on (as in a short sale situation.)  In a foreclosure suit, the bank forcibly takes title title from the borrower in default, then passes it on – in a short sale, they simply release the property from the note.

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What Is A Short Sale?

By | April 7, 2010

Once upon a time, short sales were among the rarest of transactions. Houses tended to appreciate (heavily) over time and mortgages used to come with heavy down payments, leading to lots of equity for sellers. People could wait a few years, get a few tax benefits, and then sell for a profit.

Not anymore.

These days, more and more homes are marketed as short sales (the first step a house takes toward foreclosure.) High loan-to-value mortgages and unsustainable price appreciation led to an unprecedented drop in home values.  Here are some Sarasota, Florida market statistics for the last five years:

Sarasota median sales prices

Homes prices have plummeted to unbelievable lows, but the market has stabilized substantially over the last year (as of April 7, 2010).  Lots of homeowners remain upside down in their mortgages, however, and need to find a way to sell their property.

Enter the short sale.

What is a Short Sale?

A short sale is, simply put, a way for homeowners to sell their properties for less than what they owe.  It’s not a ‘get out of jail free’ card; short sale sellers take big hits to their credit, lose any money they’ve invested in their properties, and in some cases are required to repay some or all of their mortgage after the property has been sold.

For a short sale to work, the bank that owns the note (the instrument that binds the seller to repay the mortgage) has to agree to take less than what they’re owed.  In many cases, this can be hundreds of thousands of dollars less than the original amount.

Why Would a Bank Accept a Short Sale?

Money talks.

From a bank’s perspective, here’s the problem: borrowers owe lots more than their houses are worth and are unwilling or unable to make payments.  Mortgage payments are the bank’s primary sources of income.  When borrowers don’t make payments, banks don’t make money.

Once upon a time, banks would just foreclose on properties when the borrowers went into default.  This didn’t happen often, and when it did, the income from other mortgages more than made up for the loss – and in any event, the newly foreclosed home could be sold at market value and the banks might even be able to turn a quick profit in the resale market.

These days, when banks foreclose, they’re up against heavy competition to get a house sold.  The market values are so far below what the borrower originally paid that the banks will take a loss regardless of their actions.  If they do foreclose on a home they have to sell it at a steep discount and they take over all kinds of other payments – lawn service, taxes, HOA fees, maintenance, pool guys, and more.  These are all red marks on the bank’s balance statement.

On top of that, banks have to pay attorneys to foreclose.  And lawyers ain’t cheap.

A short sale is a way for a bank to trump all of those payments – homeowners will generally maintain their own properties as long as they live in the home, the banks won’t have to pay the courts thousands of dollars in fees and costs, and at the end of the day, the banks will actually net much more by allowing a borrower to walk on their mortgage.

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