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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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5
Psychoanalysis.
Hah! No, first, cultivate patience, lots and lots of patience.
A short sale, as you probably already know, is a sale from an owner, who owes the bank more money than the current market value. It may be that he hasn't lived in it long enough to build equity; or pulled out too much equity with a line of credit; or, the value of the home has dropped since he purchased it. (all too common these days)
The owner places the property on the market, normally through an agent, to sell. The agent will most often have already ensured that the bank will pay normal fees associated with the sell, and, if possible, gotten the price pre-approved. <This is not always possible>
Eventually, the property receives an offer, and the buyer and seller negotiate terms and price. The contract is normally written with dates running, NOT from ratification, but rather, from the time of the banks approval. The contract is then sent to the bank for "3rd party approval".
This will take awhile. Banks are not in the 'risk' business, nor is this a case of one person making a decision. The bank has to determine whether the price is fair, and what kind of loss they will take. They often ask for a BPO, which is an estimate made of the properties current market value, normally prepared by an agent or appraiser. Then, they have to make sure that they will get every possible cent out of the sale.
<This is where you need patience. It is not unheard of for banks to change their mind about the price, or the terms.>
If there is a first AND second lender, the second lender often has to be happy with nothing. BOTH have to sign off on the deal.

Finally, after 30-90 days, you may get bank approval . . . . or not. There are ways to deal with this, in order to protect you. Talk to your agent for more details, and . . .

GOOD LUCK! Even with all this stress, you can still, often get a property for less than you could otherwise, and home ownership is still the gateway to amassing personal wealth!
2 votes Thank Flag Link Mon Mar 5, 2012
Oh, I also forgot to mention to make sure your agent has Short Sale Addendum that states that the clock doesn't start ticking on your contingencies - home inspection, condo resale documents, appraisal, financing, etc. - until the 3rd party approval is in. Also, be prepared to make all of these happen in a very short period of time when they do approve, because they usually set a deadline by which they will allow the sale to go through for that amount.
1 vote Thank Flag Link Mon Mar 5, 2012
Hi there,

Because newbies reading this might not know what a short sale is - it is when an owner is asking their mortgage holder to allow them to sell their home for less than what they owe on it, thus selling it short.

In the past, and occasionally today, a short-sale could take 6 months to a year. But because so many of them have been happening, the process has become more commonplace and negotiations are more routine, so a short sale will typically close in 120 days from contract ratification - the date that both parties have come to an agreement and signed all contracts.

The initial negotiations between the buyer and seller are the same as what happens in a normal sale, back and forth until an agreement is reached. The next part is what takes so long - getting the bank (or banks) that hold the mortgage(s) to agree that the owner can sell it for the amount agreed upon. Now, what most buyers do not know is that, until a first offer is received and accepted by the owner/seller, the bank will not even TALK to the owner or negotiator about short selling the property. They also have to prove hardship to the bank, loss of income, loss of job, death, medical reasons, etc. as to why they are unable to continue making mortgage payments and need to sell the home.

A good Realtor® will have a negotiator ready with everything needed to begin the process once they have an offer in hand. As the process proceeds, a buyer should look for requests from the other agent such as signing an "Arms-Length Affidavit" which states you are not related to the owner, do not know the owner, and will not sell-back or rent to the owner once you take ownership. They may also ask for the buyer's social security number to provide proof that you are not in a delinquent loan to their bank. This is common, however, I am always hesitant to give out personal information like that for my clients and discovered it is only necessary for them to have the FIRST FIVE digits of your social security number, not the entire number, in order to go through this process. If you are a Realtor® purchasing a short-sale property, they may not allow you to receive a commission from the sale.

There may be weeks between communications from the bank, because they just do not have the manpower or inclination to increase manpower, for this area. Once the sale is approved by the bank, though, typically it can be closed on within a week and the bank will request a specific date that it be closed by so that interest does not continue to accumulate on the total.

A few things to note if you are thinking about buying a short sale:
1- If you can pay cash and/or don't need closing costs, your contract is more likely to be approved, but the negotiator can guide you on whether or not to ask for closing costs based on their experience. Some banks will pay closing costs, it just depends on the bank.
2- The house will most-likely be an as-is sale, so don't expect any repairs to be made. In fact, in almost all the short-sales I've seen, the homes have not had regular maintenance and because the homeowner doesn't WANT to sell, but needs to sell, they are not going to do anything to make the home more attractive to a buyer. So, go in with your "what can I do with this place" hat on. Also, because it is as-is, ask for a home warranty. They may reject it, but they also may go ahead and buy it for you. I've had about 50/50 success in this with short sales.
3- Be patient. That settlement deadline may be looming and you may be ready to jump and go find something else, thinking you have been wasting your time, but unless the bank just decides to foreclose, it can still happen. There may be more negotiating on your part to be done, but patience can pay off big.

Hope this helps!
:)
Kelly
1 vote Thank Flag Link Mon Mar 5, 2012
It can take 3 months to do a short sale. Although, I sold a short sale and closed in 2.5 months. I have an awesome negotiator!!

A pitfall would be to buy a short sale that is not previosly approved at a set price and having your offer countered. Or you could end up with deficiencies, it's important to work with someone experienced with short sales..
0 votes Thank Flag Link Fri Apr 20, 2012
I agree with the process stated already. I think the biggest difference with regular sales is it is much easier to get the seller to accept your offer, but that is just the beginning and not the end of the process, as the bank may counter your offer to a higher price (after you have waited 6 weeks or so to find out). I think short sales are where the best buys are in this current DC area market, where foreclosures get so many bidders and regular sellers price homes higher. You need lots of patience all round, and may have to make several offers to get one through to closing. For short sale sellers you need to be ready to provide lots of personal information to the bank and have some degree of provable "hardship". You also cannot have a lot of assets or they will want some of them as compensation for taking a loss. For buyers they work best if there is only one lender on the seller side and if two then ideally with the same bank. Almost always they are sold as is, so conventional loans work best. Having an experienced Negotiator in charge of dealing with the banks helps. Some lenders are quite easy to work with on short sales currently, and some frankly just don't seem to want to make them work, but it can vary case by case. Because there is no govnerment standard or requirements I'm aware of for short sale, it is very much hit and miss. The local board of realtors have produced standardized forms that realtors should add to short sale contracts that protect the parties and explain how the process works before and after bank approval. One problem I have encountererd recently is after the first trust approves the sale, does the buyer go ahead and start processing their loan or do they wait for the 2nd trust approval. This is where things can fall apart if a buyer waits and then does not have time to get the loan approved after waiting for 2nd trust approval, and they make you start the process all over (another 4-6 weeks). I have seen some fabulous buys for those who made it through the slow process. Whoever is the point of contact with the bank needs to be very attentive to followup, and both sellers and buyers have to be committed to the process.
0 votes Thank Flag Link Tue Apr 17, 2012
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