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10 crucial steps to 'short sale' buying
By Bobbi Dempsey · Bankrate.com
There are very few active buyers in the real estate market these days -- but every one of them seems to be looking to buy a foreclosure or a short sale.
Foreclosure is a fairly well understood process, but as "short sale" signs sprout like weeds, you may wonder what it's all about.
When a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it's called a short sale. The lender forgives the remaining balance of the loan.
Everyone loses -- or wins
Short sales are a mixed bag for the buyer, the seller and the lender.
If you're a seller, a short sale is likely to damage your credit -- but not as badly as a foreclosure. You'll also walk away from your home without a penny from the deal, making it difficult for you to find another place to live.
The buyer gets the property at a reduced price but the property in all likelihood has its share of problems -- think fixer-upper -- and will need to go through considerable red tape in order to make the deal happen.
The lender takes a financial loss but perhaps not as large a loss as it might if it forecloses on the property.
Before you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail.
Two short-sale killers
· No default on loan -- lenders almost never will accept short sale offers or requests for short sales until the borrower is far behind in payments and a notice of default has been issued.
· Bankruptcy -- If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies.
Can it work for you?
Buying a home in a short sale can be a hassle, so why should you consider it? Mainly, it boils down to the bottom line. You will get the property for a substantial discount. Since the lender is eager to continue to get paid back the money it loaned out -- it may also offer favorable financing terms.
Since the seller plays an active role in the short sale process, you will have their cooperation (and most likely won't need to evict them upon taking possession of the home). This is not always the case with a property that has gone through foreclosure.
Whether you've become aware of the distressed situation on a property through an agent, an FSBO ad or word-of-mouth, this is not a do-it-yourself project. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training or a good track record with short sales.
Why lenders (might) agree
It might seem counterintuitive for a lender to go along with a short sale. After all, a lender is legally entitled to pursue the full balance of the loan. When a homeowner falls behind on payments, the lender can (and often does) hold the borrower responsible for every penny owed.
And yet more and more lenders are willing to consider approving a short sale. In a January survey of senior loan officers conducted by the Federal Reserve Board, more than 65 percent of those surveyed said they anticipate short sales or deed-in-lieu of foreclosures to be significant loss-mitigation steps for 2008.
Lenders are painfully aware of just how bad the current foreclosure crisis is. They know the cold reality is that a large number of struggling borrowers will end up losing their homes and often see the advisability in accepting the inevitable and trying to minimize their losses. Yet, some lenders seem to remain in denial. "Some of them are being tougher right now than they have a right to be," says Richard Geller, of MortgageReliefFormula.com. "I wonder if they expect a big bailout somehow. I expect lenders to get a lot more desperate later in 2008."
Foreclosure is an expensive and time-consuming process for a lender. By agreeing to a short sale, the lender wraps up this little mess quickly, and perhaps with less of a loss than it would have incurred with a foreclosure.
Remember, after foreclosing the lender owns the home and has to maintain it, insure it and pay taxes on it. So instead of receiving payments each month, the lender is now forking out money every month. Plus, short sales help the lender look good on paper -- the property never gets listed as an actual foreclosure, which helps the lender's numbers. They see it as the lesser of two evils -- if the numbers make sense for them.
By the numbers
A typical short sale involves a series of steps, generally in this order:
10 steps to short-sale home buying
1. Identify potential short-sales
2. View the property
3. Do your research
4. Find all liens and mortgages
5. Figure out the financing
6. Contact the lender
7. Complete the lender's short sale application
8. Assemble the proposal
9. Negotiate
10. Seal the deal
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