Both answers below are accurate, so if you consider buying a short sale property, here is the process, along with some tips:
Banks typically require licensed agents to be involved with short sales, and they pay the commissions, so you should find an agent to represent your best interests (no cost to you, of course). Have them show you some homes and then write offers on the ones you like enough. Once a seller agrees and signs your offer, they will forward to their bank, along with the required short sale documentation (aka short sale package). The bank will then assign the file to a negotiator, who will commission a valuation of the property, usually a broker price opinion, which is an opinion from a local real estate broker, which can make or break the deal. There are tips to making sure this goes well, which your agent should know, or I can share with you if you contact me directly via phone, text, email, or through my Trulia contact page (see my bio). Once the bank receives the valuation, this number becomes very important and determines how much the bank will accept (based on return to their investor). You see, they have historical data on the cost of foreclosure and essentially, they will likely approve a short sale offer that will net them more than foreclosure will. This number is typically what will NET them about 80-90% of the valuation (which they consider current market value), depending on the bank. So, you can see why the valuation means so much! Now, some banks (and most credit unions) require the borrower to sign a note for any deficiency, if state law does not prohibit it. One thing is certain, and that is that things are always changing in this game. Some of the large banks are actually experimenting with compensating borrowers for completing short sales. And, if the loan was backed by Frannie or Freddie, they bank is required to respond to an offer within 60 days, and update all parties weekly if they donâ€™t answer within 30 days.
But back to the process. While waiting for the valuation, the bank will also be reviewing the documents from the seller to determine if they have an actual hardship and truly can not afford the property. Banks used to require a legitimate hardship in order to approve a short sale, but again, change happens, so some banks do not seem as concerned about that part anymore. Once they have reviewed the sellerâ€™s situation and they have the valuation, the bank will make a decisionâ€¦ hopefully. You see, sometimes banks never give an answer back, so the listing agent needs to stay on top of them, and the buyerâ€™s agent needs to make sure that happens. As you have likely heard before, this can take anywhere from 2 to 10 months. And sometimes, even though you offered the full list price, the bank comes back 4 months later to say they want $10K more! This is because most banks will not give any indication to the seller or their agent what they will approve, so the seller lists the house at a price they think might garner an offer. However, more changeâ€¦ some banks are beginning to approve a price before an offer is submitted, so you might shop for â€œpreapproved short salesâ€. Now, smaller regional banks are often much more responsive than the larger nationals, so you might ask about that when you are considering a house. Also, if there is more than one lien, with different lienholders, release of all the liens will have to be negotiated, which can add more time, of course. As you can see, there are many variables to this complex transaction, but a good agent can help you navigate to success. However, short sales are not proving to be the best bargains right now. If you think about what I said above, the banks usually need to net between 80-90% of current market value. Net means after all costs, which includes 6% for the agents and other closing costs which can add another 2-3%, so the acceptable purchase price is really about 88-99% of market value, which frankly, isnâ€™t the greatest deal, especially considering the hassle!
The latest data seems to indicate that REOs (bank owned properties) are selling at the largest discount, so you might consider foreclosuresâ€¦ especially since the bank lists the price they want and they will answer your offer within a day or two! If you do pursue short sales, make sure your agent writes your offers so that you can continue to shop for other homes. You can not afford to wait 6 months for a rejection before looking for another home! Make sure to keep this in mind while you are shopping.
Happy house hunting!