Getting Started With Shortselling
Buyers of short sales have unique experiences. Not only do they need to understand the steps of a short sale approval process, they must have an abundance of patience. In some situations there is a specific timetable to move out of their present home or a specific date by which they need to be into their new home, the frustration level in these situations can be very high. In situations such as these a short sale may not be the best option. This is when it becomes very important to be sure the Realtor you work with is very experienced in the short sale process and can fully explain what to expect during the process. While this may not eliminate all of the frustration of the short-sale process, it certainly helps.
A big plus in considering a short sale with the intention of it being your primary home, you usually can buy the property for less than market value and have a clean title paid for by the short sale lender; however, it is important to know you cannot count on closing the transaction until the day you actually close. When buying the property as an investment either to rent or flip, the timetable is typically not as critical and patience is usually not an issue.
In either case, the best way to start the buying process of a short sale is to place an offer on the property as soon as it hits the market or the same day the Listing Agent takes the new listing. When making the offer, it is suggested to use an As-Is contract. Developing a relationship with a short sale agent in advance is key to knowing immediately when listings come to that agent or when new listings go on the market. Once you decide you want to make an offer on a property, your offer will be immediately presented to the lender in accordance with their guidelines. When making the offer keep in mind that the offer can be lower than the listing amount but typically not less than 75-80% of the list price. Although you have made an offer, the actual acceptable sale price from the short sale lender will not be determined until the lender counteroffers and then you can certainly counter again.
The listing agent sets the price at a retail level based on comparable sales in the area, but is usually a "best guess" at what the lender will accept. The lender will send out their own analyzer, a BPO (Brokers Price Opinion), or a full Appraisal to determine the market value of the property. After they receive that value of the property, the lender confers with the investor who holds the paper (the actual mortgage) and they decide together the minimum acceptable price for the property. The price typically comes back at around 85% of the value that was determined. It is possible that the analyzer can come back with an unrealistically high value. In that case, there is a process to appeal the valuation, however, it is a difficult one which listing agents prefer not to do. Again, using an experienced short sale Realtor can come in handy in this type of situation.
Once the lender communicates the price that is the lowest they will accept, it becomes very important to meet the terms of the lender regarding the following steps:
1. First, an inspection of the property needs to be conducted within the contracted period.
2. After the inspection, you should decide whether or not to continue with the purchase. If you decide to continue, but have discovered, through the inspection, that there are items major enough to affect the value, and you believe the lender was not aware of such items when the property was analyzed, you may request a price reduction. In order to request the reduction, you will need as much detail as possible to justify the reduction in sale price. Obtaining pictures and contractor quotes is a must. History has shown that in some cases the lender is flexible and will adjust the price, but, in other cases the lender will stick with the assessment given by their own analyzer. When getting the inspection, it is recommended your insurance company performs a 4-point inspection, as well as wind mitigation. Typically the cost of those reports can be paid for after you decide to move forward and the inspection report is reviewed. Your inspection company will need those reports to obtain a discounted rate for your property insurance.
3. Once you determine to proceed with the purchase, financing comes in to play. This can be another major issue for buyers in the short sale process. Cash purchases are much less complex than getting a loan for the home. With a cash purchase, the recommendation is to purchase property insurance, although it is not a requirement. With a mortgage, property insurance will be required by the lender. Typically, with either type of purchase, an owner's title insurance policy will be paid for by the lender. By far the biggest challenge with getting a mortgage for a short sale is the closing agent needs to have all the closing documents and funds in their office prior to the expiration date of the short sale approval letter. This issue has sabotaged more short sales than any other factor.
There are, of course, many issues that can affect the timing of the loan approval, including, but not limited to, an appraisal, HOA fees, survey, municipal lien report, etc. In order to have all the required paperwork complete to assure a clean title, you will need to allow for several weeks. The loan underwriting process can also cause heartache. The lenders need to meet all guidelines for lending which may include explaining every large bank deposit and obtaining bank statements for every account for several months. The appraisal has also stalled or stopped many loans from being approved. For instance, if the appraisal comes back less than the purchase price, the lender will not be able to lend the amount you requested, leaving you with the possibility of coming up with the difference in your down payment. Unfortunately, fighting an appraisal is difficult and usually results in no change.
Another big issue using a mortgage with a short sale closing is that the lender usually looks at the short sale approval letter and bases their timetable on that expiration date. The lender does not take into account that if the closing date needs to be extended due to the closing documents not being in order, it is unlikely that the short sale lender will extend the expiration date. In this case the short sale process may need to start over, or, at least have the situation reevaluated. It is possible the short sale lender will not approve another short sale, and, instead go to foreclosure, or possibly decide the property has gone up in value and may now demand more money. Additionally, the Realtor may elect not to continue with the difficult process and cancel the listing. Also, keep in mind, the mortgage lenders are not used to dealing with short sales and think nothing of asking for an extension of the contract. In typical equity sales, most sellers will agree to wait a few more days or weeks, but, in a short sale these extensions usually cause tremendous frustration for all parties involved.
4. Still, more complications can arise in a short sale, especially when you are dealing with existing tenants. It is obviously much easier to purchase a short sale with a vacant home. Short sales where the homeowner is still living in the home can, of course, also be challenging, but, it is typically much easier than if there are tenants in the home. Common challenges with a tenant are, moving out on time before the sale, and, even the possibility the tenant may cause damage to the property, or remove agreed upon fixtures and appliances. The eviction process can be a burden the new homeowner does not want, or need, during this already challenging process. Keep in mind, when purchasing a property as an investment, having a good tenant makes sense.
Lastly, regardless of the challenges that exist when entering the process of buying a short sale property, the advantages, particularly having to do with the money saved by acquiring a home below market value, generally outweigh the disadvantages.