Pensacola Short Sales

Short Sales: 10 Steps You Need to Take

There are few active buyers in the real estate market right now- the ones that are left seem to be looking for a good deal A.K.A.- Foreclosures or Short Sales!

Do you know the Difference?

As I talk to people they seem to know very little about the difference between a foreclosure and a short sale. This is easy to explain. When a home is foreclosure the bank has reposed the home and they are selling the property.

A short sale is different; this is when the current owner has negotiated a deal with their lender to sell the home at or below market value. This keep the bank from having to foreclose on the property. When a short sale deal is made the lender then forgives the remaining balance of the loan.

Everyone Wins, Right? Not Always

Short sales can be a mixed bag for the buyer, seller and lender. When the seller goes through the short sale process it will likely damage their credit, but not as much if they went through foreclosure. The seller will also be walking away from the deal with no profit, which makes it difficult to find another place to live.

The buyer usually gets a great deal with a short sale because they are getting a house at or below market value. But, yes there is a but; if you are not careful you may end up with a house that needs to be repaired extensively and that will out into your profit.

The lender will be taking a loss, but one that is not as large of one as it might be if it is foreclosed.

Whether you've become aware of the distressed situation on a property through an agent, an FSBO ad or word-of-mouth, this is not a do-it-yourself project. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training or a good track record with short sales.

1. Identify potential short-sales
Locate preforeclosures in your area. You can use an online database, search courthouse listings, legal ads or by using an experienced real estate agent as a buyer's agent. I would suggest a realtor. First, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it's a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home -- the lender likely will prefer to foreclose and resell closer to the market price.

2. View the property
Gauge its condition and come up with a rough estimate of how much it's going to take to repair or renovate. If it needs work, many "normal" buyers won't consider it, which is good for you.

3. Do your research
What is the property worth? What's the profit potential? This is also something that a professional realtor can help you with. If you're an investor or even a homeowner planning to live in the home a short time you'll want to profit from the deal.

4. Find all liens and mortgages
Ask the seller or his agent what liens are on the property, and which lender is the primary lien holder.

5. Figure out the financing
This is critical. You have to know how you're going to pay for the property. If you're a good credit risk, the existing lender may be willing to give you a loan. Since they already have a lot of your information in the short-sale paperwork, they may be able to expedite the loan application process. It's important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common the lender will require closing in as few as 20 days. This is too late to start shopping for a mortgage.

6. Contact the lender

Your agent should speak with the loss mitigation department (or perhaps the resource recovery department) rather than the collection or customer service department, which is only interested in recouping past due loan payments. Finding the decision maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign (notarization is usually required) an authorization letter, which gives the lender permission to discuss the mortgage situation with you.

7. Complete the lender's short sale application, if they have one
Many lenders have an application specifically for a short sale request.

8. Assemble the proposal
The proposal generally consists of a package of materials including the application and authorization letter plus:

· The purchase and sale contract -- signed by you and the seller -- to buy the property for a specified price. The lender is not going to entertain tentative offers. You're not going to get the chance to ask the bank, "Would you take X number of dollars?" In most cases this also means posting a sizable amount of money to demonstrate your desire and ability to go through with the transaction if it is accepted. If you can't make a sizable down payment, the lender would have no reason to believe you can do any better than the last owner. It's also very important to the buyer that the contract be contingent upon all lenders approving the short sale in writing.

· A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments -- usually 90 days. The lender must be convinced taking a smaller loss now is better than a bigger loss later. To make that case, start with a letter written by the seller giving an overview of the seller's desperate situation. The lender must recognize the seller's inability to pay the loan -- immediately and in the foreseeable future -- and that the situation is irreversible. The seller should supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shutoff notices, car repossession paperwork, last two years tax returns, recent pay stubs and recent bank statements. If the lender thinks the seller has money or assets stashed away, it will never go along with a short sale.

· A statement of the property's value. This can be an appraisal or a broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you. You want to show the lender that the seller would not be able to get enough for the home via a normal sale to satisfy the loan. Compile a list of all the negatives and problems of the home that negatively affect the value and make it undesirable to the average buyer and tougher for the lender to resell. The longer a lender must hold onto a property, the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale. Many short sales are turned down because the lender doesn't think the offer is high enough. I advise doing this before the lender does a valuation. There are ethical and legitimate ways to get a low valuation and if you show this to the lender to start with your offer won't look so low.

· Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands. If you can convince the lender the home is a money pit, all the better. Take photos of any damages and get estimates of the repair costs. Note: This is also a good opportunity for you to take an honest look at the property, and decide if you are willing and able to invest the time and money required to fix it up. Remember: A short sale is always an as-is sale. The lender is not going to pay for or otherwise be responsible for any repairs. But, for example, if the lender forecloses, there's a good chance it will be forced to make repairs just to get the house resold. That's one of the liabilities the lender may face.

· A settlement statement. This statement (which can be prepared by a closing agent or real estate lawyer) outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often referred to as a net sheet and the information can be entered onto a HUD-1 Settlement Statement to show the final, negative result at closing.

9. Negotiate
It's not uncommon for the lender to reject your offer or to come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don't be afraid to walk away if the lender won't meet your figure.

10. Seal the deal
Once you've reached an agreement that all three parties (you, the seller and the lender) are OK with, get everything in writing and officially recorded. Make sure the seller understands all of the terms of the deal. Next comes the closing and the property is yours.

Please remember this time is of the essence. While you negotiate with the lender, the clock keeps ticking. Do everything you can to get the lender to move quickly. Many short sales fall apart because the lender moves too slowly and fails to complete the deal before the property goes to auction.

Pre-Foreclosures/Short Sales

Short Sales: 10 Steps You Need to Take

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