Banks don’t want to lose money. The bank is absolutely going to lose a lot of money if someone forecloses on their house – but less so with a short sale process.
Foreclosures are what happens when the owners can’t pay their mortgage and the bank sells the home to the highest bidder, trying to recover some cash, as they’re technically negative on that house. You can see some homes, that are valued at $ 200,000 or more, foreclosing for under $ 100,000.
It’s a great deal for the buyer, but not such a great deal for the bank. A short sale, on the other hand, is a step above a foreclosure. The bank is still going to lose some money in the transaction, but not nearly as much as they would with a foreclosure.
And if you’re looking to buy a house, happening upon a short sale seems like you’ve hit the lottery – but the short sale process isn’t for the faint of heart. Want to learn more about it and see if it’s the right strategy for you? Keep reading.
What is and How To Win a Short Sale?
Imagine that you bought a $ 200,000 house. You put 50,000 down as a down payment (good for you!) So your mortgage is 150,000. Now for whatever reason, you can’t afford your mortgage anymore. You can’t pay your bills and a foreclosure is looming.
What do you do? You, as the seller, could look into a short sale. You put the house on the market at a low price, and collect offers. Then you go to the bank and tell them “we can’t afford to pay back all 150,000 – but would you accept one of these 50 offers that are less than what we owe, but aren’t as costly as a foreclosure?”.
The bank then looks through the offers and says yes or no. If they say yes and accept a particular offer, the people essentially sell their mortgage for less than it’s worth back to the bank, in exchange for their home.
But do you see the catch there? It was hidden, so if you didn’t, no worries. Here’s the issue: short sale homes can collect tens or even hundreds of offers. That’s not such a good thing for a buyer, who thinks they’re getting an unbelievable deal and are just “waiting on the bank’s approval”.
In reality, there’s a very, very small chance that a buyer’s offer is accepted on a short sale home, just due to the volume of offers.
Why To Buy A Short Sale ?
That’s not to say that a buyer can’t get a house at an unbelievable deal with a short sale. It’s entirely possible – but you can’t get too emotionally attached to one house (or one low price). 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. If you want to “win” a short sale, here are seventeen things you need to know. In most cases it’s a great idea because:
- Better price, in most cases price below market value of the property – Short selling investment opportunities offer buyers a great deal. As with an execution, a short sale is never offered at market value, but at a large discount. An important part of the short sale process for any real estate investor is comparing the property value to comparable properties. The Mashvisor can be a very valuable tool in this regard as each short sale property on the Mashvisor Property Marketplace is accompanied by a listing listing.
- Short Term Value Increase – the short sale property in most cases needs a repairs, they are sold ‘AS-IS’ that means, after sometimes small repairs the value f the property increases 10%+ in first year. Unlike traditional selling, where increasing market value will be the key way to add capital, short selling is a quick route to capital. Almost to blame. You will need to make major repairs to most short sale properties, and the capital may come from you if you are able to do some of the work yourself. A properly planned short sale will result in a significant jump in capital after finalization of the transaction and repairs.
- Empty unit without dealing with tenants – For any property that has a pre-existing tenant, the post-transfer plan should be clear and legal. For a short sale, insist that the seller leaves the property on the closing date. Don’t even think about renting your property again on this site. These are already proven to be bad credit risk and breaking completely is a must. In addition, short selling comes with major repairs and after-sale maintenance. The empty unit here is a blessing in disguise. No tenant will want to tolerate the amount of construction that may be needed. Work with your real estate broker or develop your own marketing plan for your new property and showcase representative photos with a “Ready For” date to generate interest before showing. It is unreasonable to show a unit that is planning a repair. It can only work to exclude buyers or tenants. Treat an empty unit as a benefit and start over with a new tenant when you bring it up to the standards.
1. BULK IT UP
If you’re determined to get a house for a really good price through a short sale, you have to put in offers on a lot of houses. One investor who makes YouTube videos says he and his team put in 100 offers on different short sales every day.
Then, months later, they might win 1-3 out of those 100 short sales. It can take that long and be that competitive. And here’s the issue with that for most people. They don’t have the capital to go through with three short sales, even if we were to win them. So how do you amend that strategy for someone with a more realistic budget? Keep putting in offers on short sales, but don’t do 100 a day.
Maybe do one every other day, if the house is in your area. A short sale isn’t something you want if you have to move in ASAP. It can be months before the owners even take the offers to the bank, let alone get them approved.
2. KNOW WHEN TO ENGAGE IN THE SHORT SALE PROCESS
Short sales are not quick sales, even though the “short” in their name makes it sound like they are. It takes longer to go through with a short sale than it does to buy a house the conventional way.
That’s to say, you have to know when to start the short sale process. If you’re just starting to think about moving but you still have six months to a year, then you could play the short sale game. But if it’s May and you have to move by August – skip the short sale process.
If you put all your eggs into that basket, you could very well find yourself moving into a too-small apartment and still waiting on approval come August.
3.MAKE A HIGHER OFFER
One good way to get a head start on short sales is to research the true market value of the home. Sites like Zillow make this easy, and you can see what homes around it are worth. Now – you absolutely shouldn’t offer the full market price.
That defeats the purpose of a short sale. But if it’s listed for 50% of what it’s worth, come in at 70% or even 75%. Remember – you don’t really care what the owners think of the offer, it’s more about what the bank wants.
And the bank is going to lose money on this sale, no matter what. So if you can make that gap smaller for them, they’re more likely to approve your offer.
4. BE PATIENT
If you haven’t figured it out yet, short sales aren’t for people that lack patience. You’re not just going to get that good of a deal without paying some sort of price. In this case, the price is time.
You will never be happy if you continue to search for what happiness consists of. You will never live if you are looking for the meaning of life.
5. HIRE A SHORT SALE CERTIFIED NAR AGENT
When you know you are going to start looking seriously at short sales, It’s really hard to find experienced person. How to fo it? There is special training for agents interested in working with short sales (the National Association of Realtors offers a short sale certification), the most important qualification an agent can have is a proven track record in the often complex and time-sucking process of short sales. Finding the right short-sale agent will save you lots of headaches down the road and help you avoid things like undisclosed liens (yikes!) And inflexible purchase agreements.
6. GET PREAPPROVED
Getting preapproved (different than pre-qualification!) For a mortgage can be one of those checklist items that falls to the wayside, but don’t allow yourself to forget about it – especially when you’re pursuing a short sale.
Make sure to communicate with your lender about the fact that you are looking into a short sale. Because short sales often occur on a lengthy timeline, you’ll want to find a lender who is flexible with how long your mortgage application is valid.
It is possible that you will be able secure a mortgage through the current homeowner’s lender or bank (and you’ll be working with them, anyway, to negotiate the sale) – but you’ll be wise to do some comparison shopping for a mortgage ! Luckily, preapproval can happen very quickly if you follow some basic steps.
A pair of binoculars in soft focus represent the search part of the short sale buying process
7. FIND A HOUSE LISTED AS A SHORT SALE
OK, you know you want one – now, how do you find them?
To start with, some homes are simply listed as “short sale,” in which case your job as a housing sleuth is easy! In other cases, listings might have language that tips you off to the fact that this is a short sale. Keep an eye out for phrases like “subject to bank approval” or “give the bank time to respond.”
Buyers can use an online database, such as a Multiple Listing Service, or consult real estate professionals who have experience in short sale transactions. Some key phrases to look for are “subject to bank approval,” “preforeclosure,” “third-party review required,” “short-sale” and “pre-approved by bank” which means that the property is being sold on a short sale.
You can also look for homes that are in default or pre-foreclosure; these can be listed online or in legal ads. Your real estate agent will be able to search the multiple listing service or MLS (only available to real estate agents) to help you find homes that are in pre-foreclosure. Agents can also help you identify homes where the current owner doesn’t have much equity in the house – the less equity the owner has, the more likely their lenders are to be interested in a short sale.
8. CHECK HOME PRICES TRENDS IN NEIGHBORHOOD
Context, context, context! Although it’s great to get a house for a lower price (especially if price is one of your main deciding factors), it’s equally important to know the context of your home in the greater neighborhood. This will help you to make educated decisions about its likely appreciation or depreciation over time. What are the home price trends in the neighborhood? Has the neighborhood weathered previous economic storms? If yes, then it’s more likely to do so again, making the home a safer investment. If you are planning on renovating and reselling the property, it can also be beneficial to think about what month is the best for re-selling the home. Boxes piled in front of a closet door indicate the kind of condition you might find homes in during the short sale buying process
9. TAKE A TOUR WITH AN EYE ON THE BONES
Touring a short-sale property is simply not going to be as aesthetically pleasing or soothing as a house tour on the regular market. It is unlikely that the seller will stage the house, so there will likely be cosmetic issues… and, ahem, “personal” decor choices – not to mention clutter.
While touring, try to focus on issues that would require major structural repair, like pests, obvious moisture or dampness, and faulty electrical connections. Remember, you’re trying to get a feel for how much of a construction project the house will be – walk in the door knowing that you are not touring a perfectly lit and landscaped dream home.
10. HOW MUCH IS THE HOUSE WORTH
Before putting an offer on the house, you’ll need to determine how much it is worth – and how much the current homeowner still owes on it.
The best way to determine the market value of the house is to pay for a professional appraisal. You can ask the current owner directly, or use tax records or other publicly available records to find out how much the seller owes.
A woman getting ready to contact a lender via phone or computer as part of the short sale buying process
11. CONTACT THE LENDER
Again, since this is a short sale, you need to work not only with the seller but also with their lenders! Your agent should help you get an authorization letter from the homeowner that will legally allow the lender to talk to you and your real estate agent. You will need to obtain this notarized letter before contacting the lender.
It is also recommended that you and your agent be provided with the name and phone number of the person from the Lender’s Loss Mitigation or Asset Recovery Department – to get an idea of the lender’s requirements for a successful short sale, so you have a personal touch for follow-up. the approval process.
12. GET INSPECTION DONE
As part of a short sale, you get exactly what you see which means in most cases you won’t be able to ask the seller for additional fixes or upgrades to the property before buying.
A thorough and transparent home inspection is really important – it will tell you what major and minor repairs are in stock so you can accurately calculate whether owning and upgrading your home to a safe standard of living is within your budget. Get a home inspection and make sure you do it right.
File cabinet showing the title research part of the short sale purchase process
13. CHECK YOUR TITLE & GET THE TITLE INSURANCE
Once you finalize your property purchase, you will be responsible for any liens on your home. This is okay if you are aware of all liens and can include them in your property’s financial plan. This is less beneficial if your home has undisclosed liens that are discovered after the sale.
Searching for titles will ensure that you know about all the pledges, plan them, and won’t be surprised when you close. Remember: even if you do not know there is a lien, you will be legally responsible for it when you own the property. Even if they aren’t trying to cheat you, sellers may not fully understand what liens are in place at home or that they are holding back the information they should disclose.
Title title insurance is a great way to protect against undisclosed liens and other nasty surprises. Title title insurance will cover all legal costs to protect your home and investment from undisclosed liens.
14. GET YOUR APPLICATION READY
Finally it’s time to apply! While the right agent should take the lead in this process, it’s good to be prepared knowing what’s in the app.
Some of the things on this list are fairly simple: you need to provide a quote, a list of any liens on the property, and a copy of your cash deposit check. You will also need to provide a package from the seller, which includes a letter of difficulties and financial information. If the house was listed on the market, an auction agreement must also be attached.
Finally, you need to present a purchase offer written by an agent. This should include language that will allow you to exit the sale if you find a different, better deal while waiting for a response.
If you are bidding before getting a full home inspection (which is common) make sure your agent has a fallback solution that will allow you to withdraw from the contract if major problems are discovered during the inspection.
Man signing documents in the short sale buying process
15. DON'T SING ANYTHING YOUR DON't UNDERSTAND
Like the cautions about fine print everywhere, signing a short sales contract without reading it and fully understanding it won’t end well for you – make sure you understand what you’re signing up for.
A good agent will walk you through the entire process and contract, but don’t be afraid to ask silly questions along the way. Better “stupid” questions now, and then surprise traps!
16. ACCEPT, DECLINE, OR THE COUNTEROFFER
Now that you’ve made an offer, it’s time to hurry up and… wait.
Waiting may end with receiving information from the bank that it will accept, reject or submit a counteroffer. However, waiting can also end up waiting longer and eventually silence.
Banks decline short selling applications for a number of reasons. Even if you and your agent regularly check in with the bank, it can be difficult to determine when to wait. The best advice is to be prepared in case of silence or rejection without losing hope entirely.
17. KEEP SEARCHING
A watched pot will never boil, and submitting a short sale home can meet an unresolved silence – hopefully not, and you are able to get your keys, drink champagne and get home repairs done!