Stop! Before You Purchase a Short Sale, Check It Out
Wait - Check It Out Before Moving Ahead
In today's real estate market, folks with cash have a great opportunity to purchase property at low prices. However, pouncing on a property that is advertised way below what you think it is probably worth can be a jump into the frying pan. Before you even think seriously about it, have it checked out well by your real estate agent to see if it is a short sale. While the prospect of a short sale is great, it is anything but simple, and very few close within a month. It can take up to six months to close a short sale, as long as the lender doesn't change their mind.
Short Sale Defined
A short sale is a situation in which the lender agrees to accept a payoff of the mortgage that is less than the amount owed - basically a discount to release the existing mortgage. Even if the seller accepts your offer to purchase, there's no guarantee the lender will agree to it. There are different reasons a lender will agree to a short sale; one is that the owner has fallen into default and the mortgage payments have not been made; the value of the property has fallen; the seller may be over-encumbered (owe more than the house is worth), so a discounted price will normalize the property with the market value.
Use Your Agent's Expertise
Have your agent do a thorough job of researching the property before you make an offer to purchase. The agent can find out several things, like who is in title, if a notice of foreclosure has been filed and how much money is owed to the lender. These pieces of information are necessary in order to help you decide how much to offer on the property. If there are two loans on the property, a first and a second mortgage, then the holder of the second mortgage is effectively ensuring the payment to the first lender, unless the second lender decides against foreclosure. If the seller owes $100,000 on the first and $30,000 on the second, then offering $100,000 puts the holder of the second mortgage out of the pay circle. In order to gain the cooperation of the second lender, the first lender will have to make it worth their while to agree to a short sale.
You And The Mortgage Holder
Generally, the lender will disagree with a short sale unless the seller has no equity at all in the property and no hope of repaying the difference between your proposed price and the existing loans. There may also be taxes owing by the owner on the amount that is forgiven. In this case, the seller needs to prepare and submit a hardship letter to the lender justifying the need for a short sale.
After the seller has accepted your offer, you have to deal with the lender. Send the offer to the lender to be approved. If the lender doesn't approve the offer, there is no deal. A copy of your earnest money deposit is important to include - the lender will likely ask for more, so don't be surprised. The lender is also going to want to be assured that you have a preapproved loan available, so include a letter indicating preapproval. It's useful to have your agent supply information that supports the price you are offering for the property. Set a time limit for the lender to respond at the end of which time you are free to cancel the offer.
