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Short Sales: 4 Things Buyers Must Do

This is the second in a two-part series. Click here for part one.

When the value of a property falls so much that the home is worth less than the mortgage, it causes a quandary for both the bank and the borrower. A short sale — in which the bank agrees to accept less than the amount owed — addresses the problem and helps all parties involved. The bank gets something rather than nothing; the homeowner gets out from under the mortgage. Both avoid the expensive and time-consuming process of a foreclosure. But if you’re the buyer, there are some important steps you need to take before moving forward with a short sale offer.

1. Fully evaluate the condition of the property before you make an offer.

When lenders evaluate a short sale request, one of the first things they review is the financial shape of the borrower. The borrower must prove financial distress; at a minimum, the borrower must be at least two or three payments behind. The lender will also review a borrower’s liquid assets to see if they could be used to pay the delinquent amount.

How does this affect you, the buyer? You need to remember that borrowers who are continuously late on their mortgage payments are also likely to defer maintenance on the home. Maybe the hot water heater doesn’t get so hot and needs replacing, but there’s no money to buy a new one. Shingles might be missing from the roof, or some electrical outlets might not work. While this can work to your advantage — you may not have as much competition for a home that needs some work — you also need to estimate how much those repairs are going to cost.

Homeowners who qualify for a short sale must provide a property disclosure form that highlights any known issues — and not just obvious problems but the not-so-obvious ones as well. Say that a pipe burst within a wall and briefly flooded the dining room. That must be disclosed. The seller should also indicate that there may be mold issues behind the walls due to the water damage, even if there’s no visible problem. Read the property disclosure form carefully.

With a short sale, you’re often able to inspect the property before the sale at an open house or by appointment. Take advantage of this opportunity. You may even want to hire a licensed home inspector to make a full report of all potential issues. At the very least, drive by.

2. Research the title.

A title report lists all current and previous owners as well as any other entity that has an existing legal interest in the property. Upon a successful offer, you’ll have time to examine the preliminary title report showing all current liens. A lien indicates a legal interest in the property that must be satisfied before the home can be transferred. A mortgage is a lien, for instance. But there are others. If a contractor performed any work on the home but hasn’t been paid, there may be a mechanic’s lien that can only be released when the contractor has been paid in full. Delinquent property taxes and federal and state income taxes may also be a problem.

An owner may have more than a second (or even third) mortgage, a home improvement loan or even a home equity line of credit. In a short sale, these liens will still need to be paid in full or otherwise resolved. The bank with the first mortgage may agree to a short sale, but the others may not.

A divorce can also be an issue. When couples split and the divorce decree is signed, the ex-spouse may remain on title. If so, the “ex” will have to deed the ownership back to the person living in the home before the home can be sold.

3. Check the listing agent’s experience with short sales.

Before the housing debacle, many banks weren’t used to short sale requests and didn’t have properly trained staff to evaluate, approve and manage them. Today, short sales are much more common, and as more and more occur, the time it takes to process a short sale request has shrunk. When you approach the listing agent, ask if he or she is experienced dealing with short sales. (A real estate agent who has the “SFR” designation has been certified as a short sale and foreclosure specialist.)

The agent representing the seller should have experience working with a bank’s short sale department and be up to speed on what documentation the bank requires and the steps that need to be completed. Without the proper presentation, the short sale request could be bungled, delayed or perhaps declined solely because the agent and the owner did not follow the proper bank protocol.

4. Get pre-approved for financing.

When a bank first evaluates an offer, you want to make it as appealing as possible. That means the bank needs to be convinced of your ability to close on time. Along with your signed sales contract, you should include an approval letter from your lender. This letter should be on the lender’s letterhead along with your loan officer’s contact information, and it should highlight the amount for which you’re qualified, which just happens to be the very same as the short sale amount.

The letter should also state the items that your bank reviewed when issuing your approval. It doesn’t have to list how much money you make or how much you have in your bank account, but the letter should point out that your income, assets and credit have been evaluated and approved, and all that’s needed is a property address. The very one listed in the sales contract!

The pre-approval letter is still a key part of the short sale approval process if you’re the winning bidder, so make sure to get one from your lender before bidding. Then, you’ll be ready to bid on the home you want!

This information was originally published on Auction.com,
LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.

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The Short Sale Primer for Real Estate Investors

Thanks to the housing crisis of the last decade, most consumers are familiar with real estate terms like “foreclosure” and “subprime,” even if they don’t fully understand them. But one term that might not be as familiar is “short sale.” Yet short sales provide a good opportunity for novice real estate investors to buy real estate below current market value.

Short Sale Math
A short sale, by definition, means that a lender has agreed to accept less than what’s owed on the mortgage as a debt paid in full. Short sales have been around for decades, but their existence was relatively unknown to the general public until lenders and agents alike began promoting the option. Here’s a typical short sale situation:

A homeowner buys a home five years ago for $500,000 and puts 10 percent down, borrowing $450,000. Over the next few years, not only does the home value fall, it falls to $300,000 based upon the relative selling price of nearby homes. But when property owners sell, they have to satisfy all existing liens on the property. In this example, the loan balance using a 30-year fixed-rate loan at 5 percent would pay down the mortgage to just over $413,000 after five years.

If the homeowner wanted to sell, the mortgage lender would say, “Fine, but you still owe us $413,000.” If the property value is $300,000, the seller needs to bring in $113,000 more just to cover the existing mortgage.

This scenario played out across the country during the housing crisis and still does to this day. Thousands of homeowners everywhere are “upside down” on their mortgages. That’s where a short sale comes into play and why real estate investors should be aware of them.

With a short sale, you’re negotiating more with the lender and less so with the owner. Why? Because the lender has the final say in whether they will accept less than what’s owed.

When a lender considers a short sale request, there are two possible outcomes: The home goes into foreclosure and the bank has another house in its inventory, or it accepts less than what is owed at a price closer to the current market value.

Advantages of Buying a Short Sale
So, what are the advantages to buying a short sale?

A better price. The primary advantage is a better price. Short sales are often priced below market, so a buyer can get a property for less than it would be worth if it were a traditional sale. The lender may be more anxious to negotiate a lower sales price in lieu of moving forward with a costly foreclosure. On Auction.com, buyers have the advantage of seeing each bid that is submitted. This transparency lets buyers know exactly what they need to pay in order to purchase a home, without overspending.

A chance to inspect the property. With a short sale, you also have the opportunity to inspect the property before finalizing the sale. In contrast, you may have some degree of difficulty inspecting a home that’s already been repossessed — a full inspection may not even be an option. But when the home isn’t yet foreclosed upon, the owner may be more accommodating and allow you to hire an inspector to get a solid understanding of the property’s current condition. With that in mind, the property owner is required to provide you with a list of any known issues with the property, such as recent flooding or appliances that need repair. Auction.com works closely with listing agents to ensure that buyers can view properties at open houses or by appointment.

Less competition. Considering a short sale purchase can also mean less competition. Investors who only concentrate on foreclosures — rather than pre-foreclosures — miss the short sale opportunity. In areas where housing inventory is in short supply, investors can take advantage of the short sales available exclusively on Auction.com.

Financing is often available. Foreclosure or bank-owned sales typically require that you pay cash. With bank-owned sales, this is especially true if the property is in bad condition. In contrast, lenders are more likely to finance a short sale. Because the property owner still has a financial interest in the property — and is probably still living in it — short sales are by nature less “distressed.” A majority of the short sales offered on Auction.com are financeable.

The Short Sale Timeline
Short sales do have some challenges. One major consideration is the time it takes for a bank to approve a short sale request package. Some short sale approvals can take up to 60 days or more, although banks today seem to be reducing that timeframe as more and more short sales are approved. Remember, you’re negotiating with the lender, and the real estate agent listing the home may not have very much experience with the short sale process, much less the owner.

Patience is important here. If the lender rejects your offer, you may receive a counteroffer that you can accept, counter and resubmit — and so on. This isn’t the case with Auction.com, where the auction is the negotiating process. Since the bidding process is transparent, buyers on Auction.com know what amount they need to bid online in order to win the auction. Also, the auction purchase process is often shorter, since Auction.com has a direct relationship with the mortgage servicer and experience processing thousands of short sales.

Finding a Short Sale
There are several ways to find a short sale. First, you can pay attention to “For Sale” signs that have a “Short Sale” rider attached with the contact information for the listing broker. The sign means the bank is open to a short sale request.

Another way is enlist the services of an experienced real estate agent. He or she will know the market and will give you advice on whether a property is overpriced or underpriced. Do some of your own research on real estate websites, but keep in mind that their valuations of a property may not be entirely accurate.

You can also visit the local county recorder’s office and investigate “pre-foreclosure” notices or a Notice of Default. These are the first legal steps that lenders will take before filing for foreclosure. These notices show the property owner, contact information and the lender, along with other characteristics of the home. At this stage, the lender may be open to a short sale request but the owner must make the request, not you.

Understandably, these options can entail a lot of legwork on your part.

One of the most convenient ways to find short sales as potential investments is to check the listings on Auction.com. Here, the initial work has been done for you: The lender has already accepted a short sale request — all that’s needed is a buyer. Property details and photos are available for buyers to review before choosing to place a bid.

If you have your financing options ready to go and can find a short sale in this manner, not only will it streamline the process, but you’ll also have the opportunity to get a great deal at the same time.

This information was originally published on Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.