Buying a short sale has its risks. It can take a long time for it to get approved, if at all. There can be additional liens on the property that can also cause more delays and more headaches. It's not uncommon for some of the lien holders to ask the BUYER to pay a higher amount in order to pay off some of those liens.
Make sure you have a Realtor representing you as a Buyer's Agent. And if you really want to buy a short sale, make sure that agent is experienced in those transactions.
Pre-foreclosure is the time period beginning when the borrower stops paying his/her mortgage and ends when the property is foreclosed upon. This is the time period in which a short sale may occur. Once a borrower has missed at least 3 payments, the lender usually files a Lis Pendens with the clerk of court in which the property is located.
Homeowners often attempt to do a short sale in order to avoid foreclosure. Often the lender has filed a Lis Pendens and started the foreclosure process on the property. But not always.
To purchase a short sale requires patience. After you sign a purchase agreement with the owner of a short sale property, the seller's lender(s) and/or other lien holders have to approve of the sale before you can close. If there is just 1 lender, it may take up to 2 months to hear back from the seller's lender. If there's more than 1 lender, it can take 4 months or longer to hear from all lien holders. Sometimes a short sale has a tentative approval by the lender at a certain price, so the approval process may take less than 30 days.
You also need to have your financing in order before you submit an offer. Lenders like all cash offers. They will consider buyers obtaining mortgage if you are pre-approved with your lender (not just pre-qualified), the bigger your down payment the better, and your closing time should be flexible.
Contingencies are also important in getting a short sale offer approved. The less contingencies you include in the contract, the better. If you have to be closed and move out of another house/condo/apartment by a certain deadline, a short sale may not work for you.
It's also in your best interest to do a preliminary search of the clerk of court records on a short sale property you're interested in to see if there are multiple lien holders such as 2nd or 3rd mortgage, equity lines of credit, real estate tax liens, mechanic's liens, HOA liens, etc. The more liens there are, the less likely that contract will get to the closing table as ANY of the of the lien holders can stop the sale at any time by refusing to agree to a settlement.
If you find a short sale property that you like enough to write an offer on, you should have your agent ask the listing agent if the short-sale package is ready for submission to the leder and the status of negotiations with the lien holder(s). In other words, has the listing agent done his/her short sale homework.
You would make an offer in writing to the home owner, typically on an As Is (with right to inspect) contract form. The offer will include a Short Sale Addendum. Once the seller has accepted your offer, you are bound to that contract to purchase the home according to the terms written in the contract. Your short sale addendum will stipulate how long you the buyer are willing to wait for seller's lender(s) approval. It will also indicate whether the seller can keep the listing active in the MLS and continue to submit offers to his/her lender(s) under short sale approval is obtained. The contract is signed by you the buyer and the seller, not the lender(s). The lender(s) only approve of the contract.
The most common reasons why a short sale fails to close are:
incomplete short-sale package submitted to the lender(s)
short-sale package not submitted properly so sits in a pile on a desk
the offer is too low
the buyer's offer is not strong enough in terms of financing, terms or contingenties
the lender(s) took too long and the buyer backed out
the loan was sold to investors who won't approve the short sale
junior lien holders refuse to cooperate
It's very important if you are pursuing a short sale that your agent gather as much information as possible and disclosure as to the short-sale process by the listing agent up front so to help you determine the odds of that short sale transaction closing.
I know this is a lot of information to absorb, your agent should be able to sit down with you and go over the entire process until you are comfortable with it.
Diane Christner, Realtor, GRI, SFR, CNE