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2009-12-10 09:42:46
Should I buy a Short Sale?

Understanding Short Sales

When you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price like hot fudge on a sundae, find out if the home is a short sale. Why? Because the purchase process is not as simple as you may believe, and very few can close in 30 days or less. 

While buying a home on a short sale can be frustrating and time consuming, your hard work can pay off in a home that's worth considerably more than you paid for it.  You will be far ahead of the game if you understand the short sale process and have a real estate agent experienced in short sales on your side.

What is a Short Sale?

A short sale is a transaction in which the lender agrees to accept less than the mortgage amount owed by the current homeowner.  The homeowner still owns the property but their bank is in the driver's seat.  In order for the sale to go through the bank needs to give their approval.  Each short sale is carefully reviewed by the bank and its investors because they are deciding whether to approve taking a loss on this loan.  In some cases, the difference is forgiven by the lender, and in others the homeowner must make arrangements with the lender to settle the remainder of the debt. 

Due to the recent economic crisis, including rising unemployment, and drops in home prices in communities across the nation, the number of short sales is increasing. Since a short sale generally costs the lender less than a foreclosure, it can be a viable way for a lender to minimize its losses.

What is a Bank Owned Home?

The terms 'foreclosure,' 'bank-owned property' and 'REO' are used interchangeably these days.

Technically, 'foreclosure' is the process, not an end result. It's the process the bank/lender goes through once the borrower fails to continue making payments on their mortgage. Eventually, the home is 'foreclosed' on and the borrowers are evicted.

'Bank-owned property' and 'REO' mean that the foreclosure process has been completed, the home went to auction, and that the bank has bought it. The bank has chosen a listing broker/agent to help sell it and the property is 'on the market.'  The bank usually tells the broker/agent what price to list the home for and since the bank is now the owner and not the 'middle-man' as in a short sale, the negotiation and approval process is much quicker.  Usually these home can close in 30 days.

The short sale process, from submission to short sale approval, is generally as follows:

  • Homeowner receives approval from their lender to list their home as a short sale.
  • Potential buyer makes an offer on home.
  • Offer and short sale package is submitted to the lender.
    • If the 'short sale package' is not complete, this process will stop here until the seller and their agent submit all of the documents required by the lender. 
  • Bank acknowledges receipt and creates a file for this home -- 10 to 30 days.
  • Bank orders a Broker’s Price Opinion (BPO) or appraisal -- 30 to 60 days.
  • File is reviewed -- 30 to 60 days.
  • Negotiator is assigned -- 30 to 60 days.
    • Most negotiators have between 50-100 files assigned to them at a time. Therefore the time they have to spend reviewing each file is very limited.   
  • Depending on the BPO and also how much the bank is owed by the borrower, the bank may make a counter offer.  They will notify the agent of the amount they will accept.
    • The agent will notify the buyer of this counter offer and the buyer will have the option to accept it or walk away.
    • If the buyer walks away, and if the agent has a back-up offer closer to the bank's counter offer price, the agent will submit this back-up offer to the bank.
    • If the agent does not have a back-up offer close to the bank's counter offer, the agent may change the advertised list price to reflect the price the bank will accept.
    • Depending on how much time elapses before a new offer is received, a ew offer may need to go back through all of the above steps.
  • File is approved or rejected -- 60 to 120 days.
  • For more details about each of these steps, see the page, Short Sale Process in Detail

Keep in mind short sale homes priced well will receive multiple offers and the lender may not take each offer through the above process. Most lenders only want one offer submitted to them at a time.  All other offers may be held by the seller and their agent as 'back-up' offers.  The offer price that is accepted, or that makes it through the entire process, is called an approved price.

How long will the process take?

Realistically, short sales take a MINIMUM of 90-120 days to close. Some can take even longer for these reasons:

  • The listing agent or a third-party negotiator is not on the ball and is lax about calling the lender.
  • The lender has internal problems, not enough staff or has lost the file a few times, prompting the listing agent to resend the package over and over. 
  • The appraisal is substantially higher than your offer, and the listing agent is building a case for a new appraisal.
  • There are multiple lenders because the home has a second mortgage or equity line of credit.

If you want to close quickly on a short sale home, ask if the home you are interested has an 'approved price' from the bank. 

Check the Public Records

Do your research before making an offer to purchase. Your agent can find out who is in title and how much is owed to the lender(s). This is important because it will help you to determine how much to offer. It will also reveal if there are multiple lenders, or loans. If there are you could have a problem. For example, the first mortgage lender's position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.

Hire an Agent with Short Sale Experience

It's one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an experienced short sale agent.

An agent with experience in short sales will help to expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.

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