If you are a first time homebuyer and interested in having a house at a very discounted price, a home at short sales can be a good alternative. Short sales are a better option to foreclosure, both for the seller and the lending institution which is basically the reason why you can usually find them priced lower than the prevailing market value. They are typically in a better condition as compared to distressed properties. One setback though is the time you need to invest when deciding to buy a house on short sale, not to mention the actual transactions that could be a bit complex than your usual sale and can even involve more risk.
So, if before you jump into the bandwagon of people purchasing a short sale, here are some things that you ought to know in order to precisely understand what you are getting yourself into. Reading this article while arm and help you go through the entire process of short sale and determine if indeed a short sale is the perfect choice for you.
What is a Short Sale in Real Estate?
In the real estate world, there is a process that is called a short sale, and this can happen when a homeowner is in a financial downturn or in financial trouble and decides to sell their home lower than what they owe on the mortgage. The lender of the original mortgage will get all the proceeds from the sale, and can either forgive the balance or the difference, or they can have a deficiency judgment depending on the state that you are located. In a deficiency judgment, the borrower is still required to pay the lender of what is left of the balance.
Although this may not be the perfect scenario or ideal arrangement for the lender especially when the balance is forgiven, a short sale is better off than a foreclosure. It is in fact a more preferable option for most lenders. This is a way for the homeowner and the lender to wiggle their way out of a difficult situation by taking a loss, and because of this, a buyer may in fact have some profit from this. However, buyers should also know that these transactions are not always good investments especially for those wanting to flip houses on short sale.
When Does a Home or Property Go Into This Process?
Typically, a home goes into a short sale when the borrower can no longer keep up with the monthly mortgage payments. They are homeowners that due to some financial circumstances, they can no longer afford to keep up with their loans. And instead of waiting for the bank or lender to foreclosure the property, the distressed homeowner initiates the short sale process by sending a letter to the lender.
There are a couple of important factors that the lender will consider when deciding whether to give the borrower the green light.
First, the home has to be worth less than what the homeowner owes on it. The lender may have to check on the recent sales of comparable properties in order to be really sure if this is the case.
Secondly, the seller has to prove of his dire financial situation. They have to show proof that indeed they are financially down. They need to show thing like not have any income or assets to pay back the rest of the mortgage.
During the Great Recession of 2008, Short Sale and Foreclosure had become a byword. But as the economy started to bounce back, and the housing market slowly recovered short sale somewhat seemed to have lost it popularity. However, they are still an alternative especially for bargain hunters.
Short Sales Vs Foreclosure
As mentioned above, these two have been common during the financial recession of 2008. Both these two are processes that happens when homeowners can no longer keep up with loan obligations as they are financially struggling. Or it is possible that the homeowner found out that their mortgage is underwater, which means that they owe more money than what their home is actually worth. In both, foreclosure and short sale, the homeowner will lose their home, but the gravity or the impacts of the two are different. The circumstance and repercussions between a short sale and a foreclosure are not totally the same.
The extent of the seller’s control is a big difference between the processes of short sale and foreclosure. In the former, the seller will have to submit a financial package, asking for the approval of the lender to sell the property for less than the value of what they owe on it. Thus, the seller goes into this process in his own will, which is the opposite when we talk about foreclosure. After the lender gives the homeowner the green light, a seller will be in charge in disposing the said property. But bear in mind that the lender is responsible for the negotiations and will also determine if they will accept the offer of the potential buyer or not. Remember that the lender here is trying to recoup his investment and costs.
When we talk about foreclosure, this is a legal action made by the lender against the homeowner (borrower). In this process, the lender is trying to seize the property after the borrower failed to make monthly payments for their mortgage. And although short sale and foreclosure will have an impact on one’s credit score, the latter will have a more damaging effect on the borrower’s FICO Score and even longer before they can get a new mortgage. Moreover, in a foreclosure process, it can be a bit expensive for both the seller and the lender. And ultimately it can force them to declare or file for bankruptcy in a worse scenario.
In the point of view of the seller, a short sale has a bigger advantage as this process allows them to qualify for a new home right away. The normal waiting period for obtaining an FHA loan after a short sale is about 3 years, however you can get another loan anytime after the short sale deals is consummated for as long as you have no more mortgage or installments payments left that were 30 days or more days late in the year before getting for a new loan. Furthermore, the homeowner should not have any 30-day late mortgage or installment payments in the year prior the short sale process.
For a new VA loan, the waiting period is a couple of years. Meanwhile conventional loans usually carry with a four year waiting period and 7-year waiting period for a jumbo loan.
The Short Sale Process For Buyers
The steps involve in a short sale process are almost alike or the same to your traditional deals, it is the involvement of the lender that makes it somewhat complex. A typical home buying process will basically require the seller transferring their equity to the buyer in the exchange for the agreed-upon purchasing price. But in a short sale, the transaction is at the mercy of the lender, so the process is somehow more time-consuming, paper intensive and convoluted.
Here are six steps to show the primary differences between a short sale and a traditional sale:
- First step is getting yourself approved for financing. Just like your usual home buying deal, the initial step is getting approved. While it is always beneficial for the buyers to get pre-approved prior to making an offer, it is even more vital in a short sale as the lender will want to make sure that the potential new buyer is actually able and willing to buy the property. There are companies, websites that could help you in securing approval fast and convenient. Usually it is done via online and starts by filling out the application and providing them with your permission to check your credit score and information about your current income and assets. And basing on your financials, the company can recommend mortgage options and alternatives and will advise you how much you are approved to borrow.
- Second step is getting yourself a reliable real estate agent and then find a home that you like. We all know that looking for that home would take time. However it can be a real challenge especially when your heart is set on getting a home on short sale. Instead of searching through all the available listings found in your locality, you can instead focus on pre-foreclosure home listings online. Moreover, you can look into public records by talking with your local county court. Identifying and searching for a short sale can be difficult especially when you are new to this, this where an experienced real estate agent comes in. He can help you with all the details pertaining to all the processes that go with a short sale home. He will explain all the aspects of home buying and this will include the home on short sale. If you do not know any real estate agent, there are listings for this professional. These sites can pair you up with a reliable and trusted real estate agent. They can even recommend lawyers should the need arises.
- Third step is to do a thorough research. Before you decide to make an offer, get all the information available about the property, the location and all. You can also check on the comparable sales in the locality or in surrounding areas to find out if you are killing it or if the selling value is reasonable. With a real estate, they would know and can determine the price and market value of the property since they usually have access to listing service which gives information on the prices of properties currently on the market and those that were recently disposed. Since short sales are business deals wherein the seller owes more than on the home than what it is actually worth, you will want to find out exactly how much the seller owes the lender. Prior to buying a short sale, you must ensure that you know of every person or maybe company or lienholders that has a claim to the property. Thus, it would be best to check and double check for any liens on the home. You can also ask the seller, their agent if they have, or the lender for this information. But to be on the safe side, it would be for your best interest that you ask a title company to do a title search on the property.
- Step 4 is to make an offer. When you make an offer on the property that you like, you need to use your knowledge of local home values to consider what the lender will think of what you intend to offer. You might be looking at short sale as a way to get a deal on a property, but bear in mind that the lender is trying to recoup their investment, and it is more likely to meet investor guidelines to accept your offer. Your offer should be as close as possible to the value of the home if you want your offer to be accepted. When you are looking at properties, beware of deceitful activities. If the seller asks you to pay under the table to have an opportunity to apply for a short sale, do not accept it and instead report it. Have the home that want inspected is the next step.
- Since homes that are in short sale are on “as-is” basis, it means that you cannot negotiate for a lower price just because there are issues with the property. But this should not stop you from knowing the condition of the property that you are interested in before you decide to close the deal. While the seller is expected to disclose any known visible defects, this kind of information sometimes fall through the cracks. To be extra sure of the condition of the home or property, hire a home inspection expert. This way you will know what you are getting yourself into. If the structure needs repair, check the cost or at least have an estimate, this way, you can find if the home that you like will make financial sense for you.
- The last step is closing on the property. Even after the lender have given the go signal and has accepted the borrower’s proposal, you still have to ensure that the lender and other lienholders are willing to release the collateral. Remember, the more lienholders there are, the longer the process can take, thus, you need to invest time when buying a home on short sale.
For the sale in order to close, the seller must also provide the following documentation:
Hardship Letter: This is a letter that is written by the borrower explaining his financial burdens and exactly why they no longer keep up with the mortgage payments.
Proof of Income and Assets: The seller has to provide a bank statement of at least two years and also his tax documents. This information will prove that the seller is indeed in financial downturn and has no funds available to keep up with his loans.
List of Liens: While some sellers may be in debt to only the lender, there are others who have multiple debts after suffering from financial difficulties. The seller has to give an updated list of all liens on the said property or home.
Comparative Market Analysis: A lender will insist in proving that the seller owes more than what the house is worth after seeing the list of comparables properties that are in the market currently and have been sold in the last six months.
Let us say that the approval and documentation is in order, you the potential buyer will be able to close on the property, receive the keys to the house and can now move in.
Benefits of a Short Sale
For the parties involved, a short sale can really be beneficial. A short sale provide greater investment opportunities for the buyers and even minimize the financial consequences that the lender and the seller could face should there be any issues like if the property goes into foreclosure. Let us check out the benefits of a short sale for both the buyers and the sellers.
The Benefits of Short Sale on the Buyers
- The first and obvious benefit that a short sale can provide to buyers is its discounted price. Even though it is priced according to the market value, the lender is more likely to sell it in order to recoup whatever they can salvage from the property in order to cut any losses. And as a result, buyers can often have a good deal on the property as compared to buying a home on a regular transaction.
- Next benefit is it has a lesser competition. Since the lender is entangled in the deal, a short sale is tricky and can be really complicated than you regular sales. And since most buyers are not experienced in this transaction, they usually leave the negotiation table, and with fewer interested buyers, it means that there is lesser competition and you have the better chance of landing the deal since your offer will be more likely to be accepted.
The Benefits of Short Sale on the Sellers
- A short sale can prevent the home of the seller to go into foreclosure. This means that it can avoid a far more detrimental effect of foreclosure on their credit score.
- The home buyer will absorb the majority of the debt of the home seller once he paid for the home.
- In your traditional sale, the seller will usually pay for the commission of the agent, in the case of a short sale, the lender will shoulder for these type of fees.
- In most cases, the lender will usually forgive the balance after they have accepted the proceeds from the short sale. They would usually write it off as a loss. Some states have a law about this; check your locality for this. Should the lender decides to write off the remaining debt, the seller will no longer be obligated to pay off whatever debt that remains after the short sale.
- Sellers on a short sale are allowed to reenter the market and get a mortgage immediately with an FHA loan under the right conditions. To avail this, the seller has to have no late mortgage or installment payments in the last year prior to the short sale. The seller also has to have no late mortgage or installment payments for the new mortgage loan.
Setbacks of a Short Sale
- Even though a short sale may have lots of benefits, this too has its share of drawbacks and setbacks. The process of a short sale can be tricky and complicated, and usually drawn out, which further increase the riskiness of the transaction and can impact the financial capability of the buyer, seller and lender negatively. Here are some of the problems that both buyers and sellers are expected to face when they decide to go into a short sale:
- A short sale can be really time-consuming. It typically takes longer than your usual traditional or regular home sale and this is due to the involvement of the lender. The lender in this scenario is trying to recoup whatever investment they have on the property, and this may also include any lienholders, who together with the lender will take their time to negotiate and close the deal. Bear in mind that the number of liendholders will greatly affect the timetable, making the process even longer. Moreover, in cases when the seller delays the sale due to various reasons which may include second-guessing their initial decision or are not prepared with the tons of paperwork, this circumstance can drag the short sale further.
- There is also increased risk for the buyers since homes in a short sale are on a “as-is basis.” This means that all homes go without any typical disclosures and the conditions of the home as well as the quality for the deal will not be as clear to the buyer as compared to regular sale. Furthermore, there is no assurance that the deal will pushes through or will go as planned, thus, the buyer may have to risk spending more time and money on a home that they might not be able to buy after all.
- More homework. This transaction requires the buyer to put in more work upfront. Doing research to figure out the true market value of the property, know all lienholders on the home and spot any problems with the property’s condition is vital to determining or knowing if the purchase is indeed a good buy.
- The condition of the Property. Since the sellers are in a dire financial situation, chances are the homes and properties are not in tip top shape as compared to average homes being advertised on the market. Thus, the buyer has to check and double check the condition of the home, otherwise the buyer may have to spend more money doing repairs and improvements.
Short Sale Setbacks for Sellers
- Although the seller plays an active role during the entire short sale process, he or she has no negotiation power at all. It is the lender who has the ultimate power to negotiate the purchasing price of the property.
- Little to no profits. The seller owes money to the lender, and in this deal, they will not be receiving much from the proceeds of the sale of their house.
- There will be an impact on their credit score. Although not as damaging as going into a foreclosure, a short sale will still have an effect on the seller’s credit score. The higher the credit score, the bigger the hit it will have.
- There could also be some delay in getting another mortgage. After this process , the seller must complete a waiting period prior to qualifying for a new loan. Outside of an FHA loan, the waiting time could range from 2 to 7 years.
- Deficiency judgment: In some instances, the lender will sue the seller in order to get the remaining debt after this transaction. If the lender’s sues the seller, it will also have an impact on the seller’s credit score almost like going into a foreclosure. Fortunately not all states allow this. Check your area for deficiency judgment.
Easy Tips for navigating Short Sale
Before you decide on getting a home on a short sale, here are some guidelines to help you out.
- Get estimates for repairs and improvements. Remember the property is being sold on an “as-is” basis, thus you need to expect lots of repairs or even improvements. It is prudent to get the home inspected for estimates for repairs that has to be done on the structure. Having this information will let you have an idea if the property is worth it and it can also give you an idea or the power to negotiate for the price upon discussing with the lender. If you believe after checking the property that the structure is in a bad state, you will be more likely to convince the lender to sell it at a much lower price.
- Your offer has to be realistic. We all want to save more every time we buy. In fact we want it discounted higher, but when talking to the lender make sure that your offer is realistic. Offering a very low price or a low-ball offer will leave a sour taste on the lender’s mouth and may not approve your offer.
- Lenders have lost a lot of money in this investment and they want it recoup, and having as much cash with you as payment will be attractive. In fact, lenders might consider your offer or will give preference to you over other interested buyers. However if you cannot pay the entire amount in cash, at least make a huge down payment to entice them further. Just a thought, if you decide to go for financing, you need to get it preapproved first before you can make an offer.
- Instead of the lender having to pay the seller’s closing cost, offer to pay it. Usually it s the lender that pays for it including other fees that goes with this transaction, but if you offer to handle this one, it could entice them and will make your offer more appealing. And if there are other interested buyers, you could be a leg up if you offer to pay for the seller’s closing cost.
- Hire a real estate professional. While we can learn everything nowadays online, nothing beats experience especially for first time homebuyers. Professionals like real estate agents know the ins and outs of this business. They know how to untangle themselves in sticky situation like a short sale where the transactions can be tricky and complicated. And with lenders calling the shots, a trusted and experienced agent can represent you well. Moreover, with their knowledge in this business, they can advise you of the market value of the property, negotiate for a much better deal and ensure that your interest is well protected.
Is Buying a Home on Short Sale the Best Option for You?
To answer this, it would require a lot of things to ponder, things that we have mentioned above. Remember that there are things to consider and here are three vital things to bear in mind:
- The transaction on a short sale is longer than your typical home sale, thus, you need to prepare longer.
- You are buying a home that might be as distressed as its owner, and it is on an “as-is”” basis.
- You may need a bigger down payment or at pay cash to entice the lender more.
Make sure that you are fully aware of the condition of the property and how much you are going to spend on repairs and maybe improvements. Saving money on the purchasing price does not automatically mean a good home, it can be the other way around with you spending more on the renos and ultimately paying more.
If you believe that you are ready for this process, there are also companies and sites that are willing to extend their help to expedite the process. Just make sure to get preapproved first, so not to waste more time. Learn more about your options by talking to real estate people who know what they are doing.
Further Reading: An easy guide about short sales for buyers and sellers.