5 Tips to Buying a Short Sale

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What is a short sale and how does it differ from other sales?

Simply put, a short sale is when a home sells for a price that won't cover the cost of the outstanding mortgage.Short sales are different from both traditional home sales and foreclosures. In a traditional home sale, you work with only the seller and the seller's agent to make an offer. In a foreclosure, the lender has already bought the property, so you’ll make an offer directly to the lender, without a buyer involved. In a short sale, the home is being sold at a loss. So, while the seller still owns the property, the lender must approve any offers.

Below are tips on what to expect and how to have your offer stand out from the crowd.

1. Have your finances sorted

Solid financing always makes an offer appear stronger, but this is especially true in a short sale.

According to Mark Ainley of GC Realty Investments in Chicago, "You can increase your chances of having an offer accepted by either being a cash buyer or having a pre-approval letter from a lender. The pre-approval will carry more weight than a pre-qualification letter because it shows that a lender has already vetted your finances and approved you for that loan amount."

In addition to the pre-approval, being prepared to put down a sizable earnest money deposit can help move your offer to the top of the pile.

2. Be ready to wait for approval

The approval process is a bit different with short sales. The seller first has to approve your offer, as usual, but then it must be sent to the lender for review before the sale can move forward.

"Be patient. Banks take their time approving a short sale," advises, Kathryn Bishop, a Keller Williams agent in Los Angeles.

Several individuals, including the lender, will need to look at your offer before a consensus can be reached. The lender must decide how much of a loss it's willing to take on the loan and it'll likely vet your finances to make sure you are financially sound enough to buy the home.

This process could take weeks, but in most cases it will take three to four months.

3. Don’t expect contingencies

In a typical home sale, you can negotiate contingencies with the seller to reduce closing costs, cover fees, or make repairs before you finalize the deal. However, in a short sale, the lender also needs to be taken into consideration, and it is less likely to approve your contingencies.

Keep in mind that the lender is already taking a loss on the loan and won’t want to lower its profits any further.

The lender "is the one making the final decision on whether or not to accept your offer," says Karen Hanover, a former short sale negotiator with a major lender. "They are going to look at the net after all costs of sale, not just the asking price. They also want to see the properties sold as is."

4. Don't navigate a short sale alone

The bank will be trying to recoup as much of its investment as possible, and the seller will be focused on unloading the property before it's foreclosed. So who has your interest at heart? It's important to have someone in your corner who can advocate for you and make sure you leave the negotiating table satisfied.

"The buyer must be able to control who does the short sale negotiation and have the legal right to communicate with that negotiator and receive status reports," says James Tupitza, a real estate lawyer with Tupitza & Associates in West Chester, PA.

Before you even consider making an offer, make sure to bring on a real estate agent—or even legal council—who specializes in this type of transaction.