10 Steps to Buy a Short Sale

A short sale is a real estate deal in which it is especially important that you consult with an experienced real estate broker.  Not all real estate agents know how to handle a short sale, but Michelle Mahzari has the proven track record of success to guide you through this process.

1.  Identify Potential Short Sales

Contact one of our representatives here at IMAX Premier and we can show you short sales in your area.  We can help you attempt to determine how much is owed on the home in relation to its approximate value.   If it’s high, it is a good candidate because the seller might have trouble selling it for enough to satisfy the loan.  In the cases where the owner has a lot of equity, the lender will likely deny the short sale request because it makes more sense financially to foreclose and resell closer to market value.

2.  View the Property

Appraise the condition of the home and come up with a rough estimate of how much you will end up spending on repairs or renovations.  If it needs a lot of work, many “normal” buyers will not consider it, which can mean a better deal for you.

3.  Do Your Research

Find out how much the property is worth.  Compare the home to similar ones in the neighborhood   Figure out what the potential for profit is.  Even if you are not an investor planning to flip the home, but want to make it your primary residence for some time, you will want to profit from the deal.

4.  Find All Liens and Mortgages

Ask the seller what liens are placed on the property and which is the primary lender.

5.  Figure out Financing

You need to know how much you will have to pay for the property.  If you are low-risk, the existing lender may be willing to give you a loan and since they have a lot of information already in the short-sale paperwork, they can expedite the loan application process.  It is important that you know you may have to move quickly in the short sale process.  Once an agreement is worked out, the lender may require closing in as little as 20 days which is too late to begin shopping for a mortgage.

6.  Contact the Lender

We will contact the lenders’s Loss Mitigation Department after the homeowner completes and signs an authorization letter giving the lender permission to discuss the mortgage situation with you.

7.  Complete the Lender’s Short Sale Application

Many lenders have applications specifically for short sales as opposed to typical applications.

8.  Assemble the Proposal

The proposal will consist of a package that includes the application and authorization letter in addition to:

  • The purchase and sale contract which is signed by both buyer and seller to purchase the property for a specified price.  The lender will not accept tentative offers.  You may also have to put some money down to show your desire and ability to follow through with the transaction if accepted.  If you cannot make a sizable down payment, the lender will not believe that you will be any more capable of paying than the last owner.  It is important that the buyer has the contract be contingent upon all lenders approving the short sale in writing.
  • A hardship letter.  A lender will not discuss a short sale until the homeowner has already fallen behind on payments, typically 90 days.  The lender must believe that taking a small loss now will prevent a large loss later on.  The seller must start with a letter giving a description of their financial distress.  The lender must recognize that the seller will be unable to pay the loan and the situation is irreversible.  The seller should provide as much evidence and documentation as possible because if the lender thinks the seller has money or assets, they will not agree to a short sale.
  • A statement of the property’s value.   This can be an appraisal or a broker’s price opinion (BPO).  The lower the estimate is, the better chance that the lender will agree to a short sale.  Compile a list of anything that can negatively affect the value of the home and make it harder for the lender to sell.  The longer the lender has a property, the more expensive it will become.  If the lender sees that the property will just be a financial drain, they will likely approve a short sale.  Do this before the lender does a valuation.
  • Detail the costs and liabilities.  Show the lender that it will be better to accept a short sale and take the property of their hands.  Try to convince the lender the home is a money pit by taking pictures of any damage and get estimates of the repair costs.
  • A settlement statement.  This statement outlines the purchase price, closing costs, and any other costs of fees involved in the transfer of the property.   This is sometimes referred to as a net sheet and the information can be entered onto a HUD-1 Settlement Statement to show the final, negative result at closing.

9.  Negotiate

The lender will often reject your offer and respond with a counteroffer.  You should determine before what your highest limit is and if the lender won’t meet that number, walk away.

10.  Seal the Deal

After the buyer, seller, and lender has reached an agreement, get everything in writing and official.  Make sure all parties understand the terms of the deal.  Next is closing, and the transaction is complete.

***Important Info***

1.  The process gets more complicated if there is more than one lender and junior lien holders are often absorbing the majority of the loss.  If there is a second mortgage, you will need approval from them too.  You may also find the loan was sold in a securitization and if so, you will need an approval from that company as well.  Only pursue a short sale with the primary lien holder because making a deal with a junior lien holder is pointless because the primary lien holder is still going to get whatever is owed to them.

2.  The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a tax break by changing the way forgiven amount was viewed for taxing purposes.  Prior to the passing, the amount was considered income for the borrower and subjected to tax but the new law removed that tax liability.

3.  When you are in negotiations be cognizant of the time elapsed and do everything you can to get the lender to move quickly.  Many short sales are not successful because the lender is too slow and fails to complete the deal before the property goes to auction.

4.  Some buyers have negotiated with the lender to minimize the damage to the seller’s credit rating.  If you can get the lender to not report this as a black mark, it will give the seller a big head start in repairing their finances.  Typically, the loan will show on the credit report as “paid” but with a notation saying something like “settled for less than originally owed” which is more favorable than a foreclosure, but still negative.

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