Short sales are far less common in the U.S. housing market today – the peak years were 2008 to 2012, during the mortgage crisis – but they’re still part of the homebuying landscape. A short sale can yield a good deal on a property, but it generally takes a certain amount of fortitude and patience, plus a lot of luck. Due to the complexity of the transaction, short selling falls relatively frequently.
Buying a home for a short sale can look like theft – with prices up to 40% below the valuation – until piles of paperwork and delays take hold.
For 11 million US homeowners who are underwater in their mortgages – meaning they owe more than their homes are worth – a short sale can be a way to get out of a mortgage without paying the high cost of foreclosing.
The short sale proceeds are still lower than your home debt balance, but lenders are willing to accept this as they have to enforce.
However, finding a home for a short sale to buy is becoming increasingly difficult. Short selling is decreasing along with the economic recovery and the increase in apartment prices. Short sales in the US housing market without execution accounted for 15% of sales in the first quarter of the year.
Short selling is down 10% compared to the last quarter of 2019 and 35% compared to the first quarter of 2019, according to the latest RealtyTrac data.
However, you can reduce the likelihood of this happening by making sure the following are available:
1. Letter Of Difficulties
The seller must explain why he cannot continue making payments. The sadder the story, the better. A salesperson who is just tired of fighting is unlikely to be approved, but a salesperson with cancer, without a job, and with an empty bank account can.
2. Proof Of Income And Assets
If the seller has money in the bank, including pension funds, it is unlikely that the lender will allow the debt to drop. Proof of income and assets must include income tax and bank statements for at least two years back. Sometimes sellers are reluctant to present these documents because they contradict information in the original loan application, which may not be completely accurate. In this case, the transaction is unlikely to be closed.
3. Comparative Market Analysis (CMA)
If a comparative market analysis or CMA shows that the price of the property has fallen and that the property will not be sold anytime soon for the amount owed, this may support the seller’s claim that the property is worth no more than a short sales price. The analysis should include a list of comparable properties on the market and a list of properties that have been sold in the past six months or have been on the market during that period and will close soon. CMA is similar to the so-called Brokers Price Opinion, which is less formal but often more informative.
4. List Of Pledges
There may be more than one, so specify the number of liens on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS does not forgive back taxes owed by homeowners; it simply no longer requires the lien to be repaid before the property is sold. A single mortgage is an easy problem to solve.
5. Be Patient
A short sale can take 90 days or longer, largely because banks are slow, bureaucratic firms that go out with due diligence so that borrowers can afford to buy a home, Anderson says.
“If you’re buying a short sale, you have to be ready to wait,” he says.
It says a real estate broker who is not an expert in short selling may take six months or more. Remember that you are dealing with a short sale bank, not just a seller.
6. The Bank Will React
Anderson says just because you’re willing to pay the full short sale price that the seller’s real estate agent is asking for, don’t expect to get a home. He says that even if the asking price is hit, the banks will pay back and ask for a higher price. Come a little low and be prepared to counter offer more than the original offer. “How can you counteract more than you have on your list?” the buyers will ask, says Anderson. “Well, the bank can do whatever it wants because it is losing money on the house.”
7. Don’t Expect The Bank To Pay For Extras.
In the past, sellers could pay for home warranties and buyers’ closing costs, but nothing else, says Anderson. “Banks know they can find a buyer without any help,” he says.
Also, don’t expect repairs or repair credits. The property will likely be sold “as is” and the seller will likely have cleaned and repaired it as often as intended.
8. Checkout Rules
This is important even for regular sales, but in the case of a short sale it can speed up the process, says Sama. Loan approvals that are guaranteed are the best, he says, and must be prequalified by two different banks in order to have a backup lender if anything goes wrong.
9. Check The Records.
To reduce the headache of buying a home for a short sale, a search of public records could pay off, says Dana Blickensderfer, director of marketing and public relations at Blick, a Tampa Bay law firm that deals with real estate law in Florida.
Do a title deed search to make sure the property is free of liens or judgments, check with homeowners or housing association to make sure property fees have been paid, and make sure property taxes are paid, says Blickensderfer. If any of these fees are not paid for the short sale home, you will have to pay them as the new owner.
10. Cash Is A King
You probably hear it all the time. “You should buy a short sale or an acquisition. There are some great deals out there! “Or a friend says,” I paid 150 percent below market price! ” Aside from the “150 percent” portion (which most math majors know is not possible), these statements have value.
The problem is that in practice many of these “offers” may not be available to you.
Remember, when we talk about short selling (a sale where the seller’s proceeds will be less than his outstanding mortgage debt) and foreclosures (a sale where the lender is now the owner and seller), we are talking about banks for final authority. And what buyers regularly face is a kind of “discrimination” on the part of lenders. While this is legal, it is discriminatory and involves funding.
11. Supply And Demand
You probably hear it all the time. “You should buy a short sale or an acquisition. There are some great deals out there! “Or a friend says,” I paid 150 percent below market price! ” Aside from the “150 percent” portion (which most math majors know is not possible), these statements have value.
The problem is that in practice many of these “offers” may not be available to you.
Remember, when we talk about short selling (a sale where the seller’s proceeds will be less than his outstanding mortgage debt) and foreclosures (a sale where the lender is now the owner and seller), we are talking about banks for final authority. And what buyers regularly face is a kind of “discrimination” on the part of lenders. While this is legal, it is discriminatory and involves funding.
12. A Bidding War
Short sales and takeover sales tend to bring up images of year-end sales, and for good reason. These houses usually have attractive (often too attractive) price tags. Banks need to consider the cost of maintaining unsold non-profitable inventories or, in the case of a short sale, increasing those inventories through another foreclosure. This enables them to justify their low price strategies. Banks are not interested in becoming land barons; their goal is to move these properties quickly.
The result is twofold: competition can be fierce in lender-controlled bids; and prices that seem too good to be true usually are.
While many of these properties will sell for less than what would be considered “market value,” an inexpensive offer seen in today’s marketplace is like a buddy thrown into a shark tank; every potential trader on the side, including many well-funded investors, is vying for a slice of the stock. Prices often exceed the asking price. When the seller has a choice, it means the survival of the fittest.
Another thing I see more often is that “best fit” does not necessarily mean “richest”.
13. Not All Buyers Are Created Equal
Here’s the part that feels more than a little unfair if you’re a typical buyer. Where it was widely understood yesterday that salespeople only deal with profit – money – banks today are less interested in financial results and more focused on speed. This is because for lenders with an unproductive loan or empty property, time is money.
Consequently, we saw the restrictions on sale offers in danger. “No FHA or VA funding” is common. Government loans can be cumbersome and banks don’t want trouble. “Property sold as-is” and “No termite inspection or home warranty” are a few other popular caveats.
Zinger stands for “Only cash offers are accepted.” Yes, we see it often. We see it for the same reasons. Lenders don’t like trouble, and loans can mean trouble today.
When selling real estate foreclosures to banks, banks are often more concerned with selling quickly than with getting the highest possible price.
14. More Stringent Credit Guidelines
The same banks that are “sellers” today are also lenders of the purchases. Their rules have changed. What used to be a single event is often a process that includes a second appraisal, and missing appraisals are all too common.
A strict policy regarding documentation of income and assets can mean that there are additional credit approval conditions in the process, and these additional conditions can significantly delay or stop the transaction altogether. So now it’s not uncommon for a cash offer to outperform a more expensive loan offer, putting the average buyer at a disadvantage.
In the case of joint ownership, the biggest problem with financing is the owner-resident dilemma. Most lenders will require at least 51 percent of the project units to be owner-occupied as a condition of financing. With a deposit of less than 20 percent, this number can be much higher.
In the old days, this meant that the buyer only had to be careful with projects with many tenants on board. Currently, a project built at its peak in the real estate market may not be eligible as most properties have been taken over and are now empty. Unfortunately, this is not a rare situation in our downtown San Diego market, with the result that many “deals” are only available to cash buyers.
15. This Is Not All Bad News!
After four or more years of falling home values in most areas of the country, prices generally become very attractive, not least when sold in distress. In addition, not every sale in distress will be unavailable to the traditional buyer who must finance the purchase.
But there is competition associated with an attractive price. Keep in mind that buying a home is a process, not an event, and that you won’t necessarily win them all. Armed with information, reasonable expectations and a competent and experienced representation, you will significantly increase your chances of winning this “deal”. At worst, you may have to settle for a really great home for a really fair price.
