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Buying a Short Sale Property

Frequently Asked Questions

General

1. What is a short sale?
2. Is the mortgage lender’s approval necessary in a short sale?
3. Why do homeowners sell their homes through a short sale?
4. Who benefits from a short sale and how do they benefit?
5. What are the pitfalls of buying a short sale property?
6. If the seller is selling a property for less than what they bought it for, does that mean the buyer instantly earns equity on the property?
7. Why does the short sale purchase process usually take longer that a regular purchase?
8. Can I complete a short sale purchase transaction on my own?

Short Sale Listings

1. How can I find properties that are being sold on a short sale?
2. What is the difference between a short sale listing that says “approved for short sale” and “third-party review required”?

Short Sale Approval

1. What are the reasons the mortgage lender will not approve a short sale?
2. What is a settlement statement?

Making an Offer for a Short Sale Property

1. What information should I look up to help me decide if I should pursue a short sale purchase?
2. Where do I find this information?
3. Should my offer match the listed price?
4. Should I start with a lowball offer in case bidding or negotiations occur?
5. What should be included when an offer is submitted?
6. What are the reasons the mortgage lender would reject an offer?
7. How can I increase the chances of my offer being accepted?
8. Should I start shopping for a lender even if the property I am interested in has not been approved for a short sale?

Other Impediments to a Short Sale

1. Why does a short sale become more difficult when there are more lenders involved?
2. Can the seller impede the short sale process?

Short Sale Contracts

1. What is the short sale addendum?
2. Can the home seller cancel the short sale contract?

General

1. What is a short sale?

   A short sale occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner’s mortgage lender(s) agrees to the “short” payoff. A short sale becomes an option when the homeowner becomes delinquent on the mortgage and does not have the funds to pay the difference between the net proceeds from the property sale and the mortgage.

2. Is the mortgage lender’s approval necessary in a short sale?

   Yes, because in a short sale, the mortgage lender will be receiving less than the loan amount it financed for the property. The lender needs to verify that the homeowner is no longer capable of paying the mortgage and determine if a short sale is less expensive than foreclosing on the property.

3. Why do homeowners sell their homes through a short sale?

   Homeowners pursue a short sale when they can no longer pay the mortgage and want to avoid a foreclosure that can be very damaging to their credit record.  With a short sale, the impact on the homeowner’s credit record may not be as detrimental as a foreclosure.

4. Who benefits from a short sale and how do they benefit?

   • Home seller – Avoids foreclosure and the many headaches that come with a foreclosure.
   • Buyer – Purchases a property at a fair market value and avoids having to deal with the risks of buying a foreclosed property.
   • Seller’s mortgage lender – Receives the most value possible out of the mortgage sooner, and avoids the costly and lengthy process of foreclosing and reselling the property.
   • All other parties – Listing agent, buyer’s agent, appraisers, mortgage broker, the title company, and the insurance company will all earn a profit from a short sale transaction for services rendered.

5. What are the pitfalls of buying a short sale property?

   • The short sale process may take several months to complete and it may be difficult to pin down a firm closing date until the seller’s mortgage lender agrees to the short sale. Junior-lien holders such as second mortgages, HELOC lenders and other special assessment liens may also need to approve the short sale. If a buyer is bound by a specific timetable to buy a home, the short sale may not be an ideal route.
   • There are many roadblocks which can derail a short sale. With extra research, a buyer should be able to uncover the possible obstacles and plan for them.
   • Buying the property on an “as is” basis.
   • The approving lender will rarely agree to pay for any extras that a regular seller would normally agree to. This could mean higher closing costs for the buyer.  The buyer will need to shoulder those costs. (For example, the buyer covers the cost for inspections and repairs).

6. If the seller is selling a property for less than what they bought it for, does that mean the buyer instantly earns equity on the property?

   Not necessarily. The seller could have bought the home at a time when property values were high, possibly in a booming market. Today, the housing market is down and the value of many properties has declined. If a buyer purchases a short sale property at a price that is lower than what the property is appraised for in today’s market, then the buyer enjoys a discount and picks up some equity.

7. Why does the short sale purchase process usually take longer that a regular purchase?

   The seller’s mortgage lender needs to thoroughly review a seller’s short sale request. Gathering the required documentation and doing bottom-line reviews can take several weeks – even months – to complete before approval for a short sale is given.  Also difficult negotiations that take place between the parties involved, such as junior-lien holders, may delay the process.

8. Can I complete a short sale purchase transaction on my own?

   Because of the complex nature of a short sale transaction, it is strongly recommended that buyers work with a real estate professional who has a track record in successful short sales. With the experience and connections, such an agent should be able to identify and help resolve possible hurdles, help put together a viable offer, protect the buyer’s interests, and negotiate the best deal.

Short Sale Listings

1. How can I find properties that are being sold on a short sale?

   Buyers can use an online database, search courthouse listings, or consult real estate professionals who have experience in short sale transactions. Aside from “short sale,” some key phrases to watch out for are “subject to bank approval,” “preforeclosure,” “third-party review required,” and “pre-approved by bank” which may indicate that the property is being sold on a short sale.

2. What is the difference between a short sale listing that says “approved for short sale” and “third-party review required”?

   “Approved for short sale” means the bank has already determined that the homeowner qualifies for a short sale and has approved the request to sell the property at a reduced price. It is possible that an earlier buyer made an offer that was approved, but did not close the transaction. Making an appropriate and timely offer on an “approved for short sale” listing may be a quicker process because the seller no longer needs to be qualified.

   “Third-party review required” means the homeowner has not sought approval yet from his/her lender to do a short sale. This means the process could take several weeks or months before closing. Plus there is a risk that the homeowner’s lender may deny the short sale request.

Short Sale Approval

1. What are the reasons the mortgage lender will not approve a short sale?

   • Homeowner is unable to demonstrate financial hardship.
   • Homeowner is still current on mortgage payments.
   • Mortgage lender has determined that the payout from private mortgage insurance could reduce the loss enough and chooses to foreclose the property.
   • Property title is not clear, possibly due to subordinate liens, and cannot easily be transferred.
   • Foreclosure process is too far along already to complete a short sale transaction.
   • Seller has filed for bankruptcy. Negotiating a short sale is considered a collection activity, which is prohibited in bankruptcies.
2. What is a settlement statement?

   Before the seller’s mortgage lender approves a short sale, it will look at the settlement statement to review the following:

   • Real estate professional commissions
   • Buyer’s financing source
   • Payment to cover outstanding liens and taxes
   • Proposed closing date
   • Expenses that raise a red flag

   These items provide the lender an idea of the buyer’s capability to purchase the property and the extent of the lender’s loss if it approves the short sale with the buyer’s price offer.

Make an Offer for a Short Sale Property

1. What information should I look up to help me decide if I should pursue a short sale purchase?

   Potential short sale buyers should work with an experienced real estate professional to find out the following:

   • Who is on the property title?
   • Have foreclosure proceedings started on the property?
   • Are there multiple offers on the property?
   • Does the listing agent have a track record of closing short sales?
   • Has the seller submitted a complete short sale package to the lender?
   • Is the seller already delinquent in paying the mortgage? 
   • Is the seller facing financial hardship, possibly due to unemployment, an illness or death in the family?
   • Are there other lien holders on the property?
   • Are there other outstanding debts on the property (unpaid utilities, HOA fees, taxes, fines)? These liens will impact the closing price.
   • What is the market value of the property?
   • What is the extent of repairs needed on the property?  Short sale properties are sold on an “as is” basis.

   An experienced real estate professional should be able to advise a buyer on how to proceed based on the information gathered.

2. Where do I find this information?

   The best way to find information on a specific property is to check the public records.

3. Should my offer match the listed price?

   Like buying any property, to increase a buyer’s chances of success, the offer needs to be competitive. In the case of a short sale, the offer may need to be closer to the market value of the property rather than the list price. Short sale listings are often priced low for the purpose of attracting multiple offers. But this doesn’t mean the property will sell at that listed price. Note that most banks will not evaluate the seller’s request for a short sale until there is an offer on the table.

   The property’s market value can easily be gauged by looking at comparable homes that have sold in the area recently.

4. Should I start with a lowball offer in case bidding or negotiations occur?

   The seller’s mortgage lender will check property values in the area so a lowball offer is not recommended. Many banks are so overwhelmed with short sale requests and multiple offers that they will most likely not even respond to offers that are not viable. Remember, the approving lender’s objective is to get as much as it can from the sale of the property.

5. What should be included when an offer is submitted?

   • The purchase contract that the buyer and the seller sign.
   • Earnest money deposit. To the bank reviewing the offer, a sizeable deposit means the buyer is a serious buyer. An earnest money deposit will be considered part of the down payment.
   • Pre-approval letter as proof that the buyer has the ability to purchase the property at the proposed price. 
   • An appraisal or a comparable listing of recent home sales in the area that show prices comparable to what the buyer is offering to pay for the property.

6. What are the reasons the mortgage lender would reject an offer?

   Offer price is too low. Lenders would normally set minimum net proceeds from a short sale of the property. Buyers can make a strong case for their offers if they show comparable sales that support their price offer.

   • Short sale package submitted by the seller is incomplete. An experienced listing agent would prevent this.
   • Seller is not eligible for a short sale. 
   • Buyer is not eligible. 
   • Indication that the short sale may not be an “arms length” transaction. The buyer must be unrelated and unaffiliated with the seller.
   • A short sale is not evaluated as the best financial option for the property.

   Note that it is not uncommon for the lender to respond with a counteroffer. As with any real estate transaction, buyers will need to know beforehand what their limits are so they can either accept the counteroffer or walk away.

7. How can I increase the chances of my offer being accepted?

   Short sale buyers, with the help of an experienced real estate professional, may increase their chances of success if they:

   • File all the required short sale paperwork in a timely and efficient manner.
   • Assure the seller they will wait for short sale approval.
   • Have a strong pre-approval letter.
   • Put down a sizeable earnest money deposit.
   • Submit an offer that closely reflects the market value of the property.
   • Follow up diligently to track the review and approval process. It is recommended that buyers obtain a name and contact number of someone at the lender’s loss mitigation department to follow up with. The buyer will need authorization from the seller to allow the mortgage lender to discuss the seller’s loan.

8. Should I start shopping for a lender even if the property I am interested in has not been approved for short sale?

   Yes. In evaluating a buyer’s offer, the seller’s mortgage lender will consider the buyer’s ability to purchase the property. Ironically, after a long wait for the lender’s approval, buyers are also expected to move quickly to close the deal. It is therefore recommended that buyers work with a reputable and flexible lender and secure pre-approval for financing by the time an offer is submitted.

Other Impediments to a Short Sale

1. Why does a short sale become more difficult when there are more lenders involved?

   A short sale can only happen when all lien holders on the property agree to the short sale. Lenders holding second mortgages on the property (such as home equity lines of credit or piggyback loans) are often the ones absorbing the loss. They will want to receive a certain amount from whatever is left after all costs are paid.  Often, there will not be enough funds left to payoff junior lien holders. Here is where the delays and negotiations take place.

   If the loan was sold to an investor, such as Freddie Mac or Fannie Mae, the investor will have to approve the short sale.  Investors will have their own requirements and review process before they approve a short sale.

2. Can the seller impede the short sale process?

   Yes, when a seller is uncooperative and slow to gather/submit the required documentation, this may stall the review process.  This sometimes happens when sellers – who know that a short sale can adversely impact their finances – are reluctant to give up their homes.  They may have very little motivation to cooperate.

Short Sale Contracts

1. What is a short sale addendum?

   A short sale addendum is a critical document in many short sale transactions because it provides the details regarding any of the following:

   • Contingencies upon which a contract can be canceled or executed.
   • Bank’s approval of the short sale.
   • Specific time period the buyer is willing to wait for short sale approval.
   • Release of the buyer’s earnest money deposit.
   • Property inspections.
   • Costs that the buyer and seller may be responsible for as a result of executing the short sale contract.
   • Consideration of multiple offers on the property.

   It is important to work with a real estate professional with experience in short sale transactions to ensure the short sale addendum includes the items that will protect the buyer’s interests during the short sale review and execution process.

2. Can the home seller cancel the short sale contract?

   Yes, a seller may cancel the short sale contract because:

   • The seller’s situation changes and they decide not to sell.
   • A foreclosure action prevents the short sale.
   • The seller accepts a higher offer.
   • The seller has filed for bankruptcy.