Purchasing a short sale can be a great opportunity, but there are a few things that you should know and consider before you decide if this is the right option for you.
What is a short sale?
A short sale is when a home is sold for less than what the homeowner owes on their mortgage. The lender must agree to accept a lower amount than what the existing loan balance is in order for a short sale to take place.
More often than not, a homeowner will look to do a short sale in order to avoid a foreclosure because the market value of their home has drastically decreased and they owe a lot more on the mortgage than what the property is worth. This is often referred to as being “under water” on the property.
Start the process by getting pre-approved
The first step to buying a home, regardless if it is a short sale or not, is to find out how much of a home you can comfortably afford. Talk to your lender to review your financial situation and get pre-approved for a specific purchase amount.
Using an agent with experience doing short sales is a benefit
Buying a short sale home is very similar to a traditional home purchase. There are a few specific aspects of the sale that an inexperienced real estate agent may not understand. It is recommended that you look for a real estate agent who has past experience with short sales, or at least, an agent who has been through the process a few times before. When you interview real estate agents, make sure to ask if they’ve had any experience with closing short sales in the area and if they would be willing to provide references.
A real estate agent with short sale experience can help you with calculating your offer. They understand what your responsibilities are, and they keep the entire transaction moving forward by constantly communicating with all parties involved.
You must properly evaluate the property
Most houses that are being sold as a short sale are sold “as is,” and for the most part, any repairs or updates would be the buyer’s responsibility. It is recommended to have a licensed home inspector thoroughly inspect the property so you know exactly what the home may need before moving forward with the purchase. Make a complete list of everything that will need to be fixed and factor all of those in when presenting your offer. This way, if your offer is accepted, you have left yourself with enough room so you can make any necessary repairs.
You should also want to have your real estate agent do a competitive market analysis, a CMA, in order to get another idea of what the home’s value should be. The agent will pull comps of similar homes that have sold and what condition they are in and how they compare to the home you are looking to purchase in order to accurately determine what the market value should be.
It’s Time to Make an Offer What Now?
- Next step is to have your real estate agent write an offer. Your real estate agent will get all the documents filled out properly and submit the offer to the seller’s agent, who will then review the offer with the seller.
- Once the seller accepts the offer, it must be submitted to the lender for their approval as well. Just because the seller accepts an offer doesn’t mean that the lender will accept it. You must keep in mind that if there is more than one lender involved that all lenders must agree to the terms of the sale.
- The lender will then evaluate the offer to ensure that it is a fair price based on market value. There is always the possibility that the lender may turn down your offer and make a counteroffer. You are not obligated to accept their counteroffer, and can choose to turn it down or continue negotiations.
- It is completely up to the lender to decide whether to accept, reject, or counteroffer any offer that they receive and most short sales will take much longer for a response in comparison to a traditional sale.
- As soon as you and the lender have agreed on a price, the lender will issue an approval letter and allow the home to be sold for less than the amount owed. An appraisal will then be done to determine the property’s actual market value. Once everything is all set, all the necessary documents will be finalized for closing.
Buying a short sale can be a very time consuming process. This option is not for everyone but if you have the patience to wait for an approval, then a short sale would be a great opportunity to potentially purchase a great home at a price that is typically thousands below market value.
Mortgage Buddy Tip:
Use an experienced real estate professional. The Mortgage Buddy recommends if you re considering a short sale in Worcester County that you contact “The Pros” If you are interested in finding out more information on short sales in your area and what the process of buying and selling them are, we would welcome the opportunity to discuss it in a private no obligation consultation.
Short Sale Timeline
Here is one of the most commonly asked questions when discussing short sales. “How long does the process take?” There is no real good answer but the average timeframe is around 3-8 months. There are always exceptions to this depending on the individual criteria and the process could be shorter or longer.
The Typical Short Sale has 4 Phases to its Process:
The First Phase is Marketing
This is the part where a homeowner will seek the services of real estate professional to market the property and find a qualified buyer willing to purchase the home. The time it takes to obtain an offer really depends on the market. In general, the average marketing time for a short sale from the time it is listed to the time an offer is accepted is around 30-60 days.
The Second Phase is Submitting the Documents
The actual length of time needed for this phase is based on the actual lender. Some lenders have more fluid short sale departments and processes than others. During this phase the lender will require the real estate agent to submit a short sale package which typically includes; a financial worksheet, hardship letter, supporting financial documentation, listing agreement, authorization forms, the accepted offer, an estimated HUD1, a pre-approval letter for the buyer, proof of funds, etc. This phase is very important as there are a lot of documents that will need to be submitted and it will require that a real estate agent be proactive and timely in responding to requests from the lender. This phase can take anywhere from 15-90 days. Once all the documents have been provided and the lender has all the necessary paperwork, we move on to the next phase.
The Third Phase is the Negotiating
During this phase the lender will order additional internal information needed for them to be able to review the offer that was accepted by the seller. The lender will have a 3rd party valuation done of the property. This could be in the form of a Broker Price Opinion (BPO) or the lender will have an actual appraisal done. The lender is looking to get a 3rd party opinion as to the fair market value of the property. Once the 3rd party valuation is completed, the lender can then review the offer with the investor on the loan to see if they are willing to approve the offer. If they think that the offer is too low or if they are not willing to pay for any additional charges itemized on the HUD1 form, the lender will then issue a counter offer to the real estate agent. At this point, the agent will start to negotiate again with the agent that represents the buyer. The actual seller does not really have anything to do at this point because the negotiations are now between the lender and the buyer. As soon a purchase price has been agreed upon the lender then sends the file to the investor to get a final approval. Once final approval is obtained the lender will issue an approval letter and the short sale will move to the next phase. This phase can take anywhere from 15-60 days.
The Fourth Phase of the Process is the Closing Phase
This phase is similar to a normal traditional sale. This phase is typically 30-45 days and involves home inspections, mortgage appraisals and commitments, and all other required paperwork.
The Pro’s @ Keller Williams Realty Greater Worcester