Getting Started With a Short Sale Purchase

7 min read

Buyers of short sales have unique experiences. Not only do they need to understand the steps of the short sale approval process, they must also have an abundance of patience. In some situations there is a specific timetable to move out of a present home or a specific date by which a buyer needs to be in a new home, and the frustration level in those situations can be very high. When that is the case, a short sale may not be the best option. This is why it is so important to be sure the Realtor you work with is experienced in the short sale process and can fully explain what to expect. While that may not eliminate all of the frustration, it certainly helps.

A big plus of considering a short sale as your primary home is that you can usually buy the property for less than market value and receive a clean title paid for by the short sale lender. However, it is important to know that you cannot count on closing the transaction until the day you actually close. When buying the property as an investment, either to rent or to flip, the timetable is typically not as critical and patience is usually less of an issue.

Making the offer

In either case, the best way to start the buying process is to place an offer on the property as soon as it hits the market, ideally the same day the listing agent takes the new listing. When making the offer, it is suggested to use an As-Is contract. Developing a relationship with a short sale agent in advance is key to learning immediately when new listings come to that agent or hit the market. Once you decide to make an offer, it will be presented to the lender in accordance with their guidelines. Keep in mind that the offer can be lower than the listing amount but typically not less than 75-80% of the list price. Although you have made an offer, the actual acceptable sale price from the short sale lender will not be determined until the lender counteroffers, and then you can certainly counter again.

The listing agent sets the price at a retail level based on comparable sales in the area, but it is usually a best guess at what the lender will accept. The lender will send out its own analyzer, a BPO (Broker's Price Opinion) or a full appraisal, to determine the market value of the property. After receiving that value, the lender confers with the investor who holds the paper (the actual mortgage), and together they decide the minimum acceptable price. The price typically comes back at around 85% of the value that was determined. It is possible for the analyzer to come back with an unrealistically high value. In that case there is a process to appeal the valuation, but it is a difficult one that listing agents prefer not to undertake. Again, using an experienced short sale Realtor can come in handy in this type of situation.

Meeting the lender's terms

Once the lender communicates the lowest price it will accept, it becomes very important to meet the lender's terms regarding the following steps.

1. First, an inspection of the property needs to be conducted within the contracted period.

2. After the inspection, you should decide whether or not to continue with the purchase. If you decide to continue but have discovered, through the inspection, items major enough to affect the value that you believe the lender was not aware of when the property was analyzed, you may request a price reduction. To request the reduction, you will need as much detail as possible to justify it; obtaining pictures and contractor quotes is a must. In some cases the lender is flexible and will adjust the price, but in others the lender will stick with the assessment given by its own analyzer. When getting the inspection, it is recommended that your insurance company perform a 4-point inspection as well as wind mitigation. The cost of those reports can typically be paid after you decide to move forward and the inspection report is reviewed. Your insurance company will need those reports to obtain a discounted rate for your property insurance.

3. Once you decide to proceed, financing comes into play. This can be another major issue for buyers in the short sale process. Cash purchases are much less complex than getting a loan for the home. With a cash purchase, purchasing property insurance is recommended, although it is not a requirement. With a mortgage, property insurance will be required by the lender. Typically, with either type of purchase, an owner's title insurance policy will be paid for by the lender. By far the biggest challenge with getting a mortgage for a short sale is that the closing agent needs to have all the closing documents and funds in their office before the expiration date of the short sale approval letter. This issue has sabotaged more short sales than any other factor.

Many issues can affect the timing of the loan approval, including but not limited to an appraisal, HOA fees, survey, and municipal lien report. To have all the required paperwork complete and assure a clean title, you will need to allow for several weeks. The loan underwriting process can also cause heartache. Lenders need to meet all guidelines for lending, which may include explaining every large deposit and obtaining bank statements for every account for several months. The appraisal has also stalled or stopped many loans from being approved. For instance, if the appraisal comes back lower than the purchase price, the lender will not be able to lend the amount you requested, leaving you with the possibility of coming up with the difference in your down payment. Unfortunately, fighting an appraisal is difficult and usually results in no change.

Another big issue when using a mortgage with a short sale closing is that the lender usually bases its timetable on the expiration date of the short sale approval letter. The lender does not take into account that if the closing date needs to be extended because the closing documents are not in order, it is unlikely the short sale lender will extend the expiration date. In that case the short sale process may need to start over, or at least be reevaluated. It is possible the short sale lender will not approve another short sale and will instead go to foreclosure, or decide the property has gone up in value and demand more money. Additionally, the Realtor may elect not to continue with the difficult process and cancel the listing. Keep in mind, too, that mortgage lenders are not used to dealing with short sales and think nothing of asking for an extension of the contract. In typical equity sales most sellers will agree to wait a few more days or weeks, but in a short sale these extensions usually cause tremendous frustration for all parties involved.

4. Still more complications can arise in a short sale, especially when you are dealing with existing tenants. It is obviously much easier to purchase a short sale with a vacant home. Short sales where the homeowner is still living in the home can also be challenging, but it is typically much easier than when there are tenants in the home. Common challenges with a tenant include moving out on time before the sale, and even the possibility that the tenant may damage the property or remove agreed-upon fixtures and appliances. The eviction process can be a burden the new homeowner does not want or need during an already challenging process. Keep in mind that when purchasing a property as an investment, having a good tenant can make sense.

Lastly, regardless of the challenges that exist when entering the process of buying a short sale property, the advantages, particularly the money saved by acquiring a home below market value, generally outweigh the disadvantages.