SHORT SALES – SOME THINGS YOU NEED TO KNOW AND UNDERSTAND

 

WHAT IS A SHORT SALE?

A short sale is a situation where the owner has taken a mortgage that was based on the apparent value of the property when they purchased it.  As property values decreased, the amount owned on the mortgage became greater than the value of the home.  Sometimes that differential is great, other times the difference may be substantially smaller.  The common factor in all this may be the owner’s ability, or should we say, inability to pay the mortgage.

The house is put on the market at a very attractive price.  Many times the price may be unrealistic in order to generate interest in the property.  Making an offer does not guaranty that you will get the property, primarily because the house has been listed at too low a price.

MAKING A REALISTIC OFFER

This is assuming that you have visited the property and found it to be in reasonably good condition and worth making an offer on, I would first recommend we run comparables to see if your offering price, plus what you estimate it would need to fix up still makes this a good deal.  Example:  We find a house listed as a short sale and is priced at an asking price of $175,000 and you want to make an offer on this house.  You estimate that you would have to put in about $15,000 to make it livable.  If the comps come in at $185,000 as an average, then I wouldn’t recommend you making an offer.  If the comps come in at $250,000, I would suggest you make an offer higher than asking price (it will become clear later.)  It is obvious the listing agent priced it too low.

WHAT IS NEEDED WHEN PRESENTING AN OFFER

If you are going to get a mortgage, you will need to get a pre-approval (not pre-qualified.)  This will have to be presented with the offer.  If you are going to get an FHA loan, you will have to have at least 3 ½% of the total agreed to sales price in cash.  Your up front money should be about ½ of that amount with the rest due at closing.  A conventional mortgage will probably require 20% down.  Your escrow deposit will have to be approximately 10% of the accepted offer.  The other 10% will be due at closing.  If you are paying cash, you will have to provide proof of funds.  This means a bank statement showing you have enough funds to pay the price you are offering.

THE OFFER AND THE PROCESS BY THE LENDER

Once you have provided the necessary requirements you can move forward with your offer.  Your offer will be an AS IS contract.  This means that the seller will not offer to rectify any of the items requiring repair or updating.  If your initial offer is accepted by the seller, it will be sent to the lender.  There will be, in most cases, and addendum that needs to be completed that has additional terms and conditions.  This addendum varies by lender and/or by attorney. 

After the seller has accepted your offer, the fun begins!  The review process normally takes 45 to 90 days before you get an answer.  In some cases, lenders can, and do, take up to 6 months to respond to an offer.  There are some considerations to take into account.  1) Many short sales will continue to accept offers.  If an offer comes in that is higher than your offer, and has the appropriate documentation, your offer may be discarded. 2) When the lender has completed the review they may respond that the offer is not acceptable.  There may not be a counter offer.  You can, if you wish, make a higher offer, but you start from the very beginning of the process again. 

If your offer is accepted, you may proceed to closing.  You will have the right to inspect the property, but this would be for information purposes only.  I always recommend that an inspection be done if only to advise you what you can expect in repairs. 

Can you get out of the deal?  If you are taking a mortgage and get turned down, the answer is yes.  Please remember, that will be difficult as you have been pre-approved.  Cash deal?  The answer is no unless all parties agree to terminate the agreement  in writing.

Think seriously before considering a short sale.  You can’t be in a rush and you can get a bargain – BUT YOU MUST BE PATIENT!