Many homeowners, as an effort to avoid foreclosure, market their
homes as a short sale. You can find a investment-worthy deals on houses headed
for default.
You will be helping remove the financial burden from the previous owners and you most likely avoid some of the entanglements of a foreclosed property - e.g., a redemption period or the possibility that the previous owners will leave you with nothing but four walls and a foundation.
Briefly, a short sale is preferable to a foreclosure, even though you may pay a bit more than you would at auction. Here are a few tips for finding the best deals when you opt to purchase a short sale property.
You will be helping remove the financial burden from the previous owners and you most likely avoid some of the entanglements of a foreclosed property - e.g., a redemption period or the possibility that the previous owners will leave you with nothing but four walls and a foundation.
Briefly, a short sale is preferable to a foreclosure, even though you may pay a bit more than you would at auction. Here are a few tips for finding the best deals when you opt to purchase a short sale property.
Use a Realtor® - Although a short sale can interpreted to mean "terrific buy",
there may be reasons that you do not want to purchase a property. A short sale
certified real estate agent can uncover any crucial information beneficial to
you. For example, they can find out if the property is going into foreclosure,
or if the short sale is just a marketing trick used to help the owner sell.
Second mortgages on short sale home will mean dealing with a secondary lender. Even if the homeowner and the original lender sign off on the sale, the secondary lender will have to, too. Ask your agent how this situation is most effectively handled. Their experience with short sales will ensure that you don't get the short end of the stick.
Be Prepared to Wait - The biggest consideration for buying a short sale property should be your time frame to move. Buying a home that is close to foreclosure in a market in which home values have dropped significantly is not as easy as you might think. For starters, even if the homeowner accepts your bid, the bank that holds title may not and could lead to weeks or months of negotiation before you come to an agreement.
Never Give Cash - Any seller who asks you for cash or other payment up front is committing fraud. Since a short sale means that you are buying the house for less than what is owed to the bank, the homeowner will come out of the deal with no money. If demands for payment seem suspicious, they probably are, so do not work with any seller using this common scheme.
Deal With the Lender - Once the homeowner agrees to your purchase price and sign the paperwork, all further dealings will be conducted with the lender. They will also have to approve the terms of your offer and then you will pay them, not the homeowner, for title to the property.
Make a Short Sale Offer with a Strong Earnest Money Deposit - If you have a deposit amount of 1% to 3% of the sale price, you are letting the sellers know you are serious about purchasing the home. The minimum down payment for FHA loans is 3.5% of the purchase price, and the earnest money is part of that down payment. Make sure you have a reasonable down payment ready, if the property is what you truly want.
Agree to Put Your Deposit into a Trust Account - Some real estate contracts call for the earnest money deposit to be placed into a trust account upon short sale approval. Sellers like to see that you are committed to the transaction.
Check the Comparable Sales - Some short sale listings are deliberately priced under market value to attract buyers like you, but it doesn't mean the home will sell at that price. Do not be alarmed, though, because many banks will approve a short sale that is priced between 5% and 10% under market.
Inspections and Condition of Property - Any inspection you would typically ask the seller to pay for will lower the bank's bottom line on the HUD-1. The lowest offers are rarely accepted and the time to negotiate major repairs is not at offer inception. Do not ask for seller-paid pest inspections, roof certifications or home warranty plans but pay for them yourself. At the very least, you should avoid purchasing a property if the seller won't let you have it inspected. If you buy the home in "as is" condition, know that any damage and pre-existing problems become your sole responsibility that turns your "cheap" property into a money pit.
Banks Need Time for Short Sale Approval - Although it is possible to receive short sale approval within 3 to 4 weeks, many banks take at least 6 to 8 weeks, and sometimes longer, to approve or reject short sales Be willing to wait 120 days and be prepared to act immediately if approval arrives earlier. If you ask for approval in 30 days, your offer may get chucked.
Wait for Short Sale Approval - The biggest problem short sale listing agents and their sellers face if you decide to walk away. Do not write offers on dozens of homes, hoping to take the first offer that sticks, which is generally against the law unless the you can afford to buy all those homes. No short sale listing agent wants to work on a transaction for several months only to find out your offer was accepted but you have vanished upon short sale approval.
When You Make a Short Sale Offer, Do Not Ask the Seller to Pay Fees - Another mistake you do not want to make is to ask the seller to pay fees that are customarily paid by buyers. After all, the seller is not the one actually paying those fees on a short sale, it's the bank. If there are certain closing costs that the seller typically pays, the bank will most likely pay those fees. However, if you agree to pay part of those fees, even if the bank receives an offer identical to yours, your offer will net the bank more money.
Provide a Strong Preapproval Letter - There may be a pile of pre-qualification letters, but a lender pre-approval letter, which specifies you are actually pre-approved for a loan, stands above them all. It will ease the seller's mind to know that you are financially capable of closing the transaction. When you make a short sale offer, you want those pieces of paper to convey strength.
Shorten Your Inspection Period - Depending on your area, standard purchase contracts will give you a specified number of days to conduct inspections. That means the home is basically off the market while you do due diligence, and the sale is not considered solid until that contingency period has been removed. If you can do your home inspections within 10 to 14 days, your offer will hold greater appeal.
Remember These Things As Well:
Second mortgages on short sale home will mean dealing with a secondary lender. Even if the homeowner and the original lender sign off on the sale, the secondary lender will have to, too. Ask your agent how this situation is most effectively handled. Their experience with short sales will ensure that you don't get the short end of the stick.
Be Prepared to Wait - The biggest consideration for buying a short sale property should be your time frame to move. Buying a home that is close to foreclosure in a market in which home values have dropped significantly is not as easy as you might think. For starters, even if the homeowner accepts your bid, the bank that holds title may not and could lead to weeks or months of negotiation before you come to an agreement.
Never Give Cash - Any seller who asks you for cash or other payment up front is committing fraud. Since a short sale means that you are buying the house for less than what is owed to the bank, the homeowner will come out of the deal with no money. If demands for payment seem suspicious, they probably are, so do not work with any seller using this common scheme.
Deal With the Lender - Once the homeowner agrees to your purchase price and sign the paperwork, all further dealings will be conducted with the lender. They will also have to approve the terms of your offer and then you will pay them, not the homeowner, for title to the property.
Make a Short Sale Offer with a Strong Earnest Money Deposit - If you have a deposit amount of 1% to 3% of the sale price, you are letting the sellers know you are serious about purchasing the home. The minimum down payment for FHA loans is 3.5% of the purchase price, and the earnest money is part of that down payment. Make sure you have a reasonable down payment ready, if the property is what you truly want.
Agree to Put Your Deposit into a Trust Account - Some real estate contracts call for the earnest money deposit to be placed into a trust account upon short sale approval. Sellers like to see that you are committed to the transaction.
Check the Comparable Sales - Some short sale listings are deliberately priced under market value to attract buyers like you, but it doesn't mean the home will sell at that price. Do not be alarmed, though, because many banks will approve a short sale that is priced between 5% and 10% under market.
Inspections and Condition of Property - Any inspection you would typically ask the seller to pay for will lower the bank's bottom line on the HUD-1. The lowest offers are rarely accepted and the time to negotiate major repairs is not at offer inception. Do not ask for seller-paid pest inspections, roof certifications or home warranty plans but pay for them yourself. At the very least, you should avoid purchasing a property if the seller won't let you have it inspected. If you buy the home in "as is" condition, know that any damage and pre-existing problems become your sole responsibility that turns your "cheap" property into a money pit.
Banks Need Time for Short Sale Approval - Although it is possible to receive short sale approval within 3 to 4 weeks, many banks take at least 6 to 8 weeks, and sometimes longer, to approve or reject short sales Be willing to wait 120 days and be prepared to act immediately if approval arrives earlier. If you ask for approval in 30 days, your offer may get chucked.
Wait for Short Sale Approval - The biggest problem short sale listing agents and their sellers face if you decide to walk away. Do not write offers on dozens of homes, hoping to take the first offer that sticks, which is generally against the law unless the you can afford to buy all those homes. No short sale listing agent wants to work on a transaction for several months only to find out your offer was accepted but you have vanished upon short sale approval.
When You Make a Short Sale Offer, Do Not Ask the Seller to Pay Fees - Another mistake you do not want to make is to ask the seller to pay fees that are customarily paid by buyers. After all, the seller is not the one actually paying those fees on a short sale, it's the bank. If there are certain closing costs that the seller typically pays, the bank will most likely pay those fees. However, if you agree to pay part of those fees, even if the bank receives an offer identical to yours, your offer will net the bank more money.
Provide a Strong Preapproval Letter - There may be a pile of pre-qualification letters, but a lender pre-approval letter, which specifies you are actually pre-approved for a loan, stands above them all. It will ease the seller's mind to know that you are financially capable of closing the transaction. When you make a short sale offer, you want those pieces of paper to convey strength.
Shorten Your Inspection Period - Depending on your area, standard purchase contracts will give you a specified number of days to conduct inspections. That means the home is basically off the market while you do due diligence, and the sale is not considered solid until that contingency period has been removed. If you can do your home inspections within 10 to 14 days, your offer will hold greater appeal.
Remember These Things As Well:
- Often
(not always the case) the seller is in jeopardy of foreclosure.
- The seller's lender(s) makes the final
approval on sales price and all terms of the contract.
- No one can guarantee that the short sale
will be approved. The lender(s) can reject or counter the your offer.
- The property can possibly go into
foreclosure before the short sale process is complete.
- Your agent, the listing agent, and the
seller are NOT in control of how fast the process moves.
- Buying a short sale home requires
patience, so make sure you have plenty on hand.
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