Short Sale Buying Guide
Posted by Colorado Group Realty on Wednesday, December 9th, 2009 at 3:15pm.Short sale: When a lender agrees to accept a mortgage payoff amount less than what is owed 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.
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 for 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, a FSBO ad or word of mouth, this is not a do it yourself project. A short sale is one real estate deal where you need to get help from an experienced broker or attorney.
1. Identify potential short sales
Locate pre-foreclosures in your area. You can use an online database, search courthouse listings, legal ads or by using an experienced real estate broker as a buyer's agent. First, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it's a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home - the lender will prefer to foreclose and resell closer to the market price.
2. View the property
Gauge its condition and come up with a rough estimate on how much it's going to take to repair or renovate.
3. Do your research
What is the property worth? What's the profit potential? If you're an investor or even a homeowner planning to live in the home a short time, you'll want to profit from the deal.
4. Find all liens and mortgages
Ask the seller or his agent what liens are on the property, and which lender is the primary lien holder.
5. Figure out the financing
You have to know how you're going to pay for the property. If you're a good credit risk, the existing lender may be willing to give you a loan. Since they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. It's important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage.
6. Contact the lender
You or your agent should speak with the loss mitigation department - or perhaps the resource recovery department - rather than the collection or customer service department, which is only interested in recouping past due loan payments. Finding the decision-maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign an authorization letter, which gives the lender permission to discuss the situation with you.
7. Complete the lender's short sale application, if they have one
Many lenders have an application specifically for a short sale request.
8. Assemble the proposal
The proposal generally consists of a package of materials including the application and authorization letter plus:
The purchase and sale contract (signed by you and the seller) to buy the property for a specified price.
A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments - usually 90 days.
A statement of the property's value. This can be an appraisal or a broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you.
Detail the costs and liabilities. You will want to show the lender it will be much better off letting you the property off its hands.
A settlement statement. This statement outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property.
9. Negotiate
It's not uncommon for the lender to reject your offer or to come back with a counteroffer.
10. Seal the deal
Once you've reached an agreement that all three parties - you, the seller and the lender - are OK with, get everything in writing and officially recorded.
More important details
The entire process gets far more complicated and uncertain of success if there is more than one lender involved
The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big break by changing the way the forgiven amount was viewed for tax purposes.
Time is of the essence. While you negotiate with the lender, the clock keeps ticking.
Some buyers have successfully negotiated with the lender to minimize the damage to the seller's credit rating.
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