As an investor I have purchased many short sales for long-term rentals and fix and flips. As a Realtor I have helped sellers sell short sales and buyers purchase short sales as well. Short sales are very unique and much different from fair market sales and even REO sales. Owner occupied buyers and investors can get incredible deals on short sales, but it is not always easy to get the deal closed. Buyers, sellers, real estate agents all must work hard and be very patient when dealing with a short sale. There is no guarantee a deal will get done until the closing documents are signed and the transaction is funded. Every state has different laws; I am in Colorado and most familiar with Colorado laws. Most of the short sale process is very similar in every state, but there are some differences from state to state. Overall short sales are a great way to buy real estate below market value!
How do short sales work?
A short sale is much different from a REO sale, which I describe how to buy here. A REO sale is when the bank has foreclosed on a property and the bank takes back possession of the home. The bank then can sell the home and make all decisions on the sale. A short sale is when the owners of the home have not been foreclosed on, but owe more to their lender or lien holders then they can sell the home for.
In a short sale the bank does not own the home and cannot accept offers or control the sale, but the bank has the final say on if they will accept a lower amount than what they are owed. The owner of the home still chooses a real estate agent, sets the listing price and can accept or reject offers. When the seller accepts a buyers offer that does not mean the bank will accept less than they are owed.
Why do sellers want to do a short sale?
Usually sellers are doing a short sale because they are facing foreclosure. A foreclosure can destroy someone’s credit as can a short sale, but many times a short sale will do less damage. Most people would rather say they sold their home then say they lost it to foreclosure. Some banks are even paying sellers to complete a short sale! Even though it is up to the seller to complete a short sale in most cases, that does not mean they will always be easy to work with. Many times people in distress will not act quickly or logically. This is all part of a short sale and buyers must be patient.
Why do banks want to complete a short sale and accept less than they are owed?
When the owners of a home fall behind on their mortgage, the banks can foreclose after a certain amount of time. The problem with a foreclosure is it is very expensive and time-consuming for the bank. The foreclosure process is different in each state, but in any state it can cost 10’s of thousands of dollars for the bank to pay lawyers and legal fees.
The other problem banks run into when they try to foreclose is they must attempt to work with the homeowners to avoid foreclosure. The government has implemented many regulations to try to decrease the amount of foreclosures. Banks have to offer loan modifications and prove they made attempts to work with the homeowners.
In some states like New York it can take two years or longer to foreclose on a home! That entire time the homeowners could be living there rent and mortgage free while the bank waits.
By doing a short sale the bank saves time, money and reduces the risk of not completing the foreclosure process correctly. In the recent mortgage settlement between the government and the largest banks in the country, banks has to pay 26 billion in fines and restitution for not completing foreclosures correctly. Even though it is normally cheaper for a bank to complete a short sale, they will give away the homes for pennies on the dollar.
How long does a short sale take?
I have completed short sales in less than two weeks, but it is extremely rare for this to happen. I would count on it taking at least six weeks for a short sale to be accepted and you should be willing to wait months in some cases. As I mentioned before, the bank wants a lot of information from the sellers and this can take time to get it all together and make sure it is all correct.
The banks also have to determine value on a short sale, which can take some time. They want to make sure they are basing their short pay off on the actual value of the home. The banks do this by ordering broker price opinions from agents (the listing agent and independent agents) using desktop valuations and full-blown appraisals. Each bank has a different formula for how much they will accept and many times it varies with each situation.
What are the chances of a short sale offer being accepted?
Before you go through the time and hassle of a short sale you need to know if it is all worth it? There is no magic formula for the chances of each short sale being approved, but the closer the offer is to actual value the better chance the short sale offer will be accepted. If the offer is not accepted you are usually out nothing except the time it took to make the offer and wait. I have had many short sale offers accepted by the seller, but rejected by the bank. Do not depend on every short sale offer accepted by the seller to close
Another thing to watch is the foreclosure date. There is no law that says the bank has to give time for a short sale or extend the foreclosure sale if an offer has been accepted by the seller. If I am the buyer or representing a buyer I always watch the foreclosure date and make sure the listing agent is aware of the foreclosure date and I take action to get that date extended if needed.
Some of the items that will make or break a short sale are the real estate agents involved and how experienced they are, if there is a negotiator involved and how many liens are against a property.
Are short sales easier to complete now than in the past?
Most people have probably heard nightmares about the short sale process. The truth is it can be a nightmare in some cases, but in other cases it can be a smooth and easy process. In most cases a short sale will take notably longer than a traditional or REO sale. The reason for the delay is the bank and lien holders have to approve accepting a lesser amount than what they are owed.
Short sales have become easier to complete, but they still take a long time.
What if there are multiple loans or liens against a home in a short sale?
In many cases a short sale may not just be asking one lender to take a short payoff. There may be a second loan, judgement or other liens on the home that also need negotiated. The more liens there are, the more difficult it is to get a short sale pay off accepted. If you are making an offer in a short sale be ready to wait, especially if there are multiple liens.
The difficulty with multiple liens on a property is many times the first loan will limit how much they will allow a second loan to be paid. The second loan may not like how much the first is allowing them to be paid and the deal won’t get done. I have dealt with some judgments that will not accept anything less than full payment and this makes it very difficult to complete a short sale.
How can buyers get a great deal on a short sale?
Banks like to do short sales over selling their homes as REOs because it costs them less money. This is one reason the banks will take less than market value on short sales. Even if the bank knew it could sell a home for $10,000 more as a REO listing, it may save the bank money to sell the home as a short sale.
Because the bank will take less than market value, it is an excellent opportunity for investors and owner occupants to get a great deal on a home. Investors may have to wait to make an offer on a REO property, but they actually have an advantage with short sales. Many times properties need work and most likely the seller isn’t going to make any repairs. If the home won’t qualify for FHA or conventional loans it limits the buyer pool for the home. A seller may be more likely to take an investor offer that is lower than an owner occupied offer since it is unlikely an owner occupant loan will go through.
How to make an offer on a short sale
Most short sales are listed on the MLS and a buyer can make an offer on them with the help of a Realtor. The list price is usually determined by the seller with the help of their Realtor. Some short sales have list prices that are pre-approved by the bank. These pre-approved short sales are hard to find as most banks will not start the short sale process until they receive an offer. This is why the short sale process can take longer than a regular sale.
The seller makes the decisions on what offers to accept and how much to accept. Sometimes sellers will accept extremely low offers if they are running out of time before the foreclosure sale. I have purchased a few short sales that were well below the asking price because the sellers were running out of time.
Once an offer is received most banks will ask for a short sale package from the listing agent or negotiator. This package will include all the financial information, pay stubs, bank accounts, a hardship letter and more from the seller. Basically the bank wants to make sure the seller can’t afford the home and really needs to do a short sale. Here is another offer on strategies regarding offers on short sales.
How do contracts on short sales work
The contract process for short sales is different for each state as each state has their own laws. In Colorado it is typical that no earnest money can be deposited until after the short sale is accepted in writing by all lien holders (short sale acceptance). In Colorado the buyer or seller can also cancel the contract at any time for any reason before short sale acceptance. Once the short sale is accepted, then the contract is enforceable like a regular contract. The appraisal, inspection and loan process is usually not started until after the short sale acceptance as well.
Offer quickly on short sale properties
I have bought a few short sales and one of the most important things to do when trying to buy a short sale is act quickly. Many times the sellers will accept the first decent offer that comes in which may be lower than the asking price.
Should you use a short sale negotiator?
In some transactions, a short sale negotiator is used by the buyers and listing agent. The short sale negotiator works with the seller and the lien holders and he or she will do their best to get the lien holders to accept the offer. Sometimes the lien holders will pay the short sale negotiation fee and sometimes the buyers will actually pay it. The fees for a short sale negotiator can vary wildly from flat fees that are a few hundred dollars to thousands of dollars or a percentage of the sales price.
Short sale fraud
Short sale fraud is the number one most investigated crime by the FBI now. There are many rules the buyer and sellers must abide by because the lien holders are accepting less than they are owed. It is difficult to know exactly what makes up short sale fraud, but if you are lying or withholding information from the banks accepting the short pay off, it could be fraud.
The banks will also ask the buyer and seller to sign paperwork known as a short sale affidavit. This affidavit says the seller and buyer are not related, the seller is not going to rent the home back from the buyer, there are no outside contracts or agreements and more. If any of these clauses are violated it could be considered short sale fraud.
If you think any party of the transaction including the real estate agents are doing something fishy be careful! People are going to jail for short sale fraud. 9 people were just indicted in Colorado for fraudulent actions involving short sales.
Short sales in Colorado
If you are a seller considering a short sale, we are very qualified to help you out. We are located in Greeley, Colorado, but service many of the surrounding areas. You want to make sure your agent knows what they are doing if you are selling your home as a short sale. There are many tax implications and legal consequences of a short sale. I have done a lot of training and have many designations regarding short sales. I am a Certified Distressed Property Expert (CDPE) and I am also Asset Plan Certified in addition to being MDI certified among others. If you need a short sale agent in another state or area I have many contacts across the country and may be able to help you find an agent. You can email me at [email protected] or check out our real estate website at simplyreo.com.
It can take time, work and disappointment before you are able to purchase a short sale. Our market is seeing increasing prices and increasing competition every day and short sales are still a way to get a great deal on a home. I am always on the look out for a short sale and although I may not get all the properties I have offers accepted on, I have purchased three in the last year.
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