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Trulia, Other/Just Looking in San Francisco, CA

What's the typical process when buying a short sale?

Asked by Trulia, San Francisco, CA Mon Mar 5, 2012

How long does it take? What are some pitfalls?

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As a buyer the short sale process can be very frustrating. I tell my clients when we make an offer on a short sale house that we should continue looking at other homes. A short sale can take many months to complete or it may not sale at all. I have had clients wait over 9 months for the bank to accept our offer only to find that the bank is not going to approve the short sale and let the house go to Trustee Sale.

So the process is to make an offer for the the short sale and then wait for the bank to hopefully approve the short sale and your offer. When and if the bank approves the short sale and your offer the home buying process is pretty normal with you getting your appraisal and home inspection done. If your inspections find any issues that need repair you will most likely have to take care of them out of your own pocket. Remember the short sale is happening because the homeowner can no longer afford to make the mortgage payments so they usually do not have any money to make repairs and the short sale bank is taking a loss on this transaction and usually won't want to make this loss larger by making repairs. After the appraisal and the home inspection is done, and you still want to buy the house, you should be able to close on whatever close date you and the short sale lender agreed upon.

Contact me if you have more questions.

Mike Knutson
2 votes Thank Flag Link Mon Mar 5, 2012
The process...
Seller for whatever reason has a hardship and can no longer continue with current moneys borrowed on property. They approach the bank to sell for less than they own. An enormous amount of paper work is required from seller to prove their position. Seller must accept to cooperate with this process or bank may refuse at any point of the process. House goes on the market and buyer has the opportunity to purchase this home at banks requirements and banks permission to do so. Each back has their own rules and guidelines for this process. One you put in an offer and seller accepts offer (must first be accepted by seller), you offer moves on to the bank and will not be approved until bank is satisfied with all of their conditions and offer. This process can be very time consuming for a variety of reasons.

Timeline - There is no fixed time... every transaction is different. Too many variables meaning how many loans, what bank, who is the negotiator. Can take anywhere between a month (next to never that quick) to up over a year. If I had to guessimate an average I would say 4 months but you cannot bank on any time line. Even if they say preapproved short sale, they still can take well over a month or more to get into escrow.

Downfalls....
1. Bank may not approve short sale.
2. Bank are more and more demanding that someone other than them pay back HOA's, so find out if HOA's are in arrears and decide if you are willing to pay for them.
3. Put on you patient hat because you think you can patient but when it drags out longer than your expectations, you get very frustrated. Brace yourself for a longer period, then it won't feel so bad if it is faster than you expected.
4. If seller has turned off utilities... first issue is condition of home and/or landscaping can change for the worst from the initial condition of when you first saw it. In addition turning on utilities for home inspection could be a little more challenging.
5. Sometimes even getting in to see home of a short sale can be a problem when owner occupied due to the fact that they are not selling because they want to. Which can also cause cooperation problems with other issues down the road. It is not the same as someone wanting to sell their house to move on. This varies... some are super nice and other buck the whole process.
6. From the beginning of short sales.... banks keep coming up with ways of changing the game to their advantage and more often than not... disadvantage of buyer. We have had buyers have to come up with additional moneys to close, now they often won't pay HOA's, they were much more cooperative in seller contributing to closing cost (seeing that change a bit and allowing for less) but don't be afraid to counter bank back.
7. BPO coming in higher than it should be and bank will not back down... therefore... it becomes a no win situation because who wants to pay more than what the house is worth.
8. Understand that the bank is looking for fair market value so there are buyers going in expecting to get a better deal and you need to be realistic with your offer price what is a fair market price.... there can be some wiggle room but buyers need to understand that you cannot go in $50,000 less just because it is a short sale.
9. The more loans on the property the slimmer your chances of getting you offer accepted are.
10. If ther is renters in the home... expect to pay cash for keys or renters demanding to stay until lease is up. Any renters in property could prove to be an issue in a variety of ways so understand that or stay clear from that transaction.
11. If listing agent is not paying attention house could get foreclosed on in the middle of the short sale so best that buyers agent watches it as well... you have a chance to stop foreclosure but becomes more challenging if it makes it to the court house steps.
12. Seller takes things you did not expect them to take and then it becomes an issue of do you still want it.
13. If listing agent sends all offers to bank it not only draws out the timeline but also could lower your possibility of being the offer that is accepted in the end. I suggest you move on unless it is a must have house. Most Realtors will not submit more than one offer unless bank demands to see all offers which is rare but can happen.
14. Listing agent not updating or responding when you want to know where you are in the process. Lake of communication can be frustrating for all parties.
15. Inexperience Listing agent or lack of constant contact with bank may effect the timeline to an already extended timeline of the process.
16. Pricing of home by listing agent can be extremely frustrating!!! Especially when they have underpriced the property just get buyers in the door... knowing full well home will not sell for said price. It is deceiving,
2 votes Thank Flag Link Mon Mar 5, 2012
The short answer? Hurry up and wait
The most important thing to remember is that even though the seller will be accepting your offer it's the bank who will determine the outcome.
A short sale is not a real estate transaction to the bank it's debt settlement and will make their decision based on that, so even though you've written what you consider a good offer and you really love the house, don't expect the bank to share your enthusiasm.
If there's one pitfall (though there are many) to avoid it's properties with multiple loans or mortgage insurance. These can take months even years to get an answer let alone an approval.
1 vote Thank Flag Link Mon Mar 5, 2012
Most short sales can take a considerable time to close. The bank approving the short sale
can take considerably longer than a seller in a non distressed property.
Make sure that you have the ability to terminate the contract if the lending instituition making the decision does not approve your contract by a fixed date.

There are great opportunities, but you have patience and determination.
0 votes Thank Flag Link Wed Mar 21, 2012
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