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Chapter 8 – Steps to Buying Short Sales (full)

Purchasing a short sale property offers both pros and cons for buyers, but in the end, many buyers find that the significant discount on the property price is enough of a reason to move forward with this type of a purchase. The shortsale process can be a bit tricky to negotiate for homebuyers.

Many steps must be followed to get through the process to finally own the home. Homebuyers considering a short sale purchase should be aware of the essential steps to navigating through this process successfully. Although every short sale transaction can vary, the following are the common steps to making a purchase in the order they generally occur.

Step #1 – Finding Shortsale Properties

Once a buyer has decided to consider a short sale home, the first step in the process is to begin finding shortsale properties. Homebuyers can begin identifying potential options by searching through courthouse listings, hiring a real estate agent experienced in dealing with short sales or by searching through an online database like that offered by Listings can be found on MLS feeds and local real estate websites as well in some cases.

Of course, in some cases, these real estate homes are not actually listed with the words “short sale” attached to them. This means that buyers must read listings very carefully. Agents may slip certain words into listings that identify the property as a shortsale.

Some of the words to look for in listings include the following:

  • Notice of Default
  • Subject to bank approval
  • Headed for auction
  • Bank needs time to respond
  • Preforeclosure
  • Preapproved by bank

Step #2 – View the Property in Person

After buyers identify short sale properties of interest, the next step is to view the property in person. Buyers should never begin putting in offers on a piece of real estate before taking time to view the home. When viewing the property, buyers should focus on the condition of the property while also coming up with a rough estimate of how much money it may cost to renovate or repair the property.

Expect shortsale properties to need some work. However, most buyers do not want to get involved with a property that requires too much work or too much money to restore the property. However, many “normal” buyers will not even consider properties that need work, which is good for buyers interested in purchasing these properties.

Step #3 – Research the Property Carefully

Once buyers have viewed the property and they are interested in pursuing the property further, it is then important to research the property carefully. Spending some time researching the property can save time later and keep potential buyers from experiencing buyer’s remorse after they have purchased the home.

When doing research on the property, some important questions to ask include the following:

  • What is the worth of the property?
  • Is there an opportunity to profit? (Both homeowners and investors will want to consider if they can profit from the deal before making the final decision).
  • What is the neighborhood like?
  • What are local properties worth?

It is also important to investigate all the liens and mortgages on the property being considered. The seller or the seller’s agent should be able to provide information on the property liens. It is also a good idea to find out which lender happens to be the primary lien holder.

Step #4 – Decide How to Finance the Purchase

Deciding how to finance the purchase of a short sale property is another important step for buyers. Before going further in the process, you must know how you plan to pay for the piece of real estate for sale. If you present a low credit risk, the current lender holding the primary lien on the property may be willing to finance the purchase. When you present the lender with the short sale paperwork later in the process, they will have much of your information, which may allow them to expedite a loan application approval.

Figuring out the financing is important because buyers need to have the ability to move quickly once involved in the buying process. Once buyers get to the agreement stage of the process and everything is negotiated and worked out, lenders often require closing to occur quickly. Buyers do not want to wait until the lender sets a close date to begin shopping for a mortgage. Getting the financing taken care of early will help the process move along faster and smoothly.

Step #5 – Contact the Lender

The next step in the process is to contact the lender. First, the homeowner will need to complete and sign an authorization letter for buyers. This letter provides the lender with the seller’s permission to discuss the financial situation with the buyer. After this authorization letter has been provided, the buyer or their agent should contact the lender by speaking with the resource recovery department or the loss mitigation department.

When establishing contact, it is best to avoid talking to the lender’s customer service department or their collections department. These departments are usually only interested in trying to recoup past due payments on the mortgage. The challenge here for buyers and their agents is often trying to get a hold of an individual that can make decisions on the home. This is a point where buyers can benefit greatly from having an agent to help them that has extensive experience dealing with these types of transactions.

Step #6 – Assemble the Short Sale Proposal for the Lender

After contacting the lender, at which time buyers should ask for and receive a short sale application, the entire proposal for the lender will need to be assembled and then sent to the lender. The shortsale proposal usually includes an entire package of essential materials required by the lender, including the seller’s authorization letter, the short sale application and several other documents. The following are some of the important materials that should be included in the proposal sent to the lender:

Hardship Letter

Buyers should keep in mind that lenders will often refuse to discuss a short sale unless the seller provides a hardship letter. The hardship letter allows the seller to make the case of their desperate situation while convincing lenders that taking the loss of a short sale now would be better than taking a larger loss in the future. Hardship letters must show the lender the seller’s inability to continue paying off the loan, both immediately and in the future. It is important that the seller provides as much documentation and evidence of their situation as possible. This may include the following:

    • Divorce papers
    • Utility shut off notices
    • Evidence of job loss
    • Two years of tax returns
    • Recent bank statements
    • Delinquent accounts
    • Recent pay stubs
    • Car repossession paperwork

If the lender believes that the seller may have assets or money stashed, they will be less likely to approve a short sale transaction.

Property Value Statement

This may be a broker’s price opinion or an actual appraisal of the property. A lower estimate of the current market value of the property is better for sellers. The goal is to show that sellers would not be able to get enough money to satisfy the loan through a normal sale. This can include a list of problems and negatives that affect the home’s value negatively, showing that the home is undesirable to the average buyer. If a lender realizes that they will end up spending more on the property if they hold on to it, they will be more likely to approve a short sale. Showing a low statement of the property value (although it must be legitimate and ethical) can help sellers get approval on lower offers, since low valuations tend to keep offers from looking as low.

Purchase and Sale Contract

This contract should be signed by both the seller and the buyer and is a contract to purchase the short sale property for a specific price. Lenders do not entertain tentative offers, so it is important to have a specified price agreed upon by the buyer and the lender on this contract. To show desire and ability to carry out the transaction, posting a sizable amount of money is important as well. A nice down payment shows lenders that the new buyer will be able to perform better on their obligations than the current homeowner.

Detailed List of Costs and Liabilities

Buyers need to show lenders that it is better to allow them to purchase the property, which can be done by adding a detailed list of the costs and liabilities to the short sale proposal. Any damages should be photographed and estimates of the repairs added to the package. This also offers potential buyers an excellent opportunity to take a closer look at the property and the time and money that will need to be invested to get it fixed.

Settlement Statement

A real estate lawyer or closing agent can prepare this statement, which provides an outline of the home purchase price, closing costs and other fees or costs that may be involved with the property transfer. This may also be referred to as a net sheet.

Step #7 – Engage in Negotiations

After the short sale proposal is given to the lender, negotiations will often ensue. It is very common for lenders to reject the first offer, then responding with their own counteroffer. Expect this to occur when preparing to purchase a short sale property.

Of course, it is important for buyers to know their highest limit on the home, which is important when engaging in any real estate transaction. If buyers are unhappy with the counteroffer provided by lenders, they do have the ability to come back with their own counteroffer. Keep in mind, if the lender will not meet the highest limit of the buyer, buyers can walk away without consequences.

To avoid extended negotiations, it is important to ensure the original proposal includes all relevant information, focusing on making the short sale look like a benefit for the lender. A well prepared proposal may help buyers to skip this step if lenders agree to the initial offer.

Step #8 – Complete the Sale

Once all three parties have come to a final agreement – the lender, buyer and seller – then everything must be in writing and recorded officially. Buyers should make sure that they and the seller understand all the terms that come with the sale. Next, closing will occur and the property will officially become the buyer’s.

Other Important Details

When going through the buying process, a few other details must be kept in mind by buyers. The following are some important details to remember when deciding to go through the short sale buying process.

  • If more than one lender is involved, the process can become much more complicated and there is less certainty of success. Junior lenders are often the ones that deal with the most loss. Buyers must remember that if there are junior lenders on the home, approval is needed from each lender to go forward with the sale. If the mortgage loan of the seller was sold to another entity, which is known as securitization, then that company will also have to offer approval before the transaction can be completed.

  • It is essential to do a title search when pursuing this type of a sale to find out about the lien position of the lenders that must be contacted. Short sale transactions should be pursued with the primary lien holder and then seek approval from junior lenders. Trying to make the initial shortsale deal with the junior lien holder will not work, since the primary lien holder still has to be paid what they are owed.

  • Timing is important, which is why some buyers have avoided these properties in the past when ready to buy a house. The clock continues to tick while going through negotiations with the lender. Buyers should work to get lenders to move as fast as possible. In some cases, these sales have been known to fall apart because the lender moved slowly and the deal was not completed before the property had to go to auction.

  • In some cases, buyers have been able to negotiate with lenders to help the seller minimize the damage they face to their credit rating. Although lenders are not obligated to agree to this term, putting this in writing as a part of the deal can help the seller and enable them to more easily rebuild their financial lives. Buyers may want to consider talking to the seller and trying to find ways to include this information in the agreement to try to minimize the damage done to the seller’s credit report.

Next: Chapter 9: How banks deal with a short sale