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Thinking of buying a Short Sale?

Posted 07-29-2011 at 11:02 PM by Sunshine Rules
Updated 08-08-2011 at 10:30 PM by Sunshine Rules

Thinking of buying a short sale?

If you’ve been looking at real estate for sale in our area, you’ve probably seen the term “short sale” on sign banners or in ads for various homes. But what exactly is a short sale?

The terms short sales, REOs and foreclosures can be confusing. Many people refer to all distressed properties as foreclosures. However, the definition of foreclosure is a legal process by which a defaulted borrower is deprived of his or her interest in the mortgaged property.

Pre-foreclosure is the time period beginning when the borrower stops paying his/her mortgage and ends when the property is foreclosed upon. This is the time period in which a short sale may occur. A short sale is when a home is being sold for less than what the current seller owes on the property, the seller does not have sufficient funds to make up the difference at closing, so the lender(s) agrees to accept a discounted payoff, ie. the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. The seller is attempting to negotiate a deal with his/her lender in the hopes of avoiding a foreclosure.

A short sale is different from a REO property, which is short for Real Estate Owned. A REO property is one in which the seller’s lender has already taken title of the home through foreclosure and is now selling it.

The obvious benefit of purchasing a short sale is that these properties are often priced at the low end of the fair market value to attract buyers. Fair market value is the price a buyer is willing to pay and a seller willing to accept for a property under reasonable and ordinary conditions in an arms length transaction. Sometimes agents list short sales at unrealistically low prices to entice a buyer to submit an offer. Your real estate agent should be able to help you determine the home's fair market value by doing a CMA (comparative market analysis), similar to a BPO (broker price opinion).

If you find a short sale property that you like enough to write an offer on, you should have your agent ask the listing agent if the short-sale package is ready for submission to the seller’s lender and/or lien holders and the status of negotiations with those lien holders. It's very important if you are pursuing a short sale that your agent gather as much information as possible up front to help you determine the odds of that short sale transaction closing. In other words, do your homework!

In some ways, buying a short sale property is like a traditional purchase. The buyer makes an offer in writing to purchase the property from the seller. The seller decides whether to accept the offer, counter back different terms to the buyer or reject the buyer’s offer. However, any offer agreed to between buyer and seller is subject to approval by the seller’s lien holders. Without that approval, the seller cannot close and you cannot purchase that home.

The offer will include a Short Sale Addendum. Once the seller has accepted your offer, you are bound to that contract to purchase the home according to the terms written in the contract. Your short sale addendum will stipulate how long you the buyer are willing to wait for the seller's lender(s) approval. It will also indicate whether the seller can keep the listing active in the MLS and continue to submit offers to his/her lender(s) under short sale approval is obtained.

Short sales are typically being sold “as is with right to inspect.” The seller does not have the financial ability to pay for repairs to the property if repair issues are found during your inspection period. For this reason, short sales may not work for buyers that are using VA or FHA financing.

After the contract and short sale package have been submitted to the seller’s lender(s), your next step is to wait. How long will it take to hear back from the seller’s lender(s)? It depends. If there’s only one lien holder, it typically takes less than 2 months to get a response. If there are multiple lien holders, it may take up to 6 months or more for all parties to respond. If any one of those lien holders say no to the terms of your contract, the sale cannot be completed.

Once the lenders and/or lien holders have given approval for the sale to proceed, they usually give a date upon which their acceptance expires. Often this deadline is 3 weeks or less. As a buyer of a short sale, you must have patience to wait for that approval, then act quickly to do inspections, obtain your financing and close.

There are risks involved in writing an offer on a short sale. However, if you have the time, patience and determination to see it through, a short sale can be a win-win situation for both buyer and seller.

Next: Six Questions to ask Yourself before Buying a Short Sale
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