Wednesday, July 22, 2009

Facing Short Sales as a Buyer: Fight or Flight?

I'm currently working with quite a few buyers that are becoming rather frustrated with the amount of deals they like that end up being short sales. In this ever-changing market, adaptability is key for success. And right now, being able to adapt to short sales can provide a good discount and a good buy...IF (and I cannot over-emphasize this!), IF you have the time and patience.

*The only way a Buyer can really understand why a short sale is so long a complicated, you'll first have to understand what the Seller has to go through (see below).

What is a Short Sale?

  • Put simply, a short sale happens when the bank approves the sale of a home for less than what is owed to the bank.
  • By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what he owes. Short sales can be a win-win for everyone.

What causes a Short Sale?

  • 1) The Home's market value has dropped, being less than what is due on the loan
  • 2) The mortgage is in or near default or late status
  • 3) The Seller has a legitamate hardship: unemployment, divorce, medical emergency, sudden illness, bankruptcy, or death.

3 Stages of the Pre-Foreclosure Process

1. Default (1 to ? Months)

2. Acceleration or Notice of Election or Demand ("The list").

3. Foreclosure (Banks want to avoid this).

3 Keys to a Successful Short Sale (on the Seller side)

  1. Knowing the proper step-by-step process, depending on the type of loan that you are shorting. The process for shorting an FHA loan is different than the process of shorting a VA or Conventional loan. So knowing the proper steps, and the order of those steps, is critical.
  2. Knowing what components each of the Lenders require for their Short Sale Package, getting a copy of the Lenders Short Sale Package in a timely manner, and then submitting that Package, in its entirety and in a format that will get the banks attention, meet their requirements and ultimately get you an approval.
  3. Knowing what the Lenders have to “net” in the Short Sale. All Lenders have a bottom-line amount or percentage that they have to “net” in the transaction. Knowing that net is absolutely imperative for you, the Agent, to know so that you know where to price the property in MLS, so that you generate an offer that will be both quick, but also sufficient to enough to meet the bank’s net requirements, cover all of you clients closing costs, as well as cover all the commissions at closing.

Basic Short Sale Package (for the Seller)

  • Authorization to Release Information Form
  • Hardship Letter
  • Financial Worksheet
  • Listing Agreement
  • Copies of Tax Returns (last 2 years)
  • Copies of All Bank Statements (last 2 months for all borrowers)
  • Copies of Pay Stubs (last 2 pay periods for all borrowers)
  • Application for Pre-Foreclosure Sale Program (if FHA, HUD Form 90036)
  • Homeownership Counseling Form (if FHA, HUD Form 90038)
  • Purchase Offer (if there is one yet)

Once all this is filled out, the bank has an offer both seller and Buyer have agreed to, then it's a matter of waiting for the bank's approval. After the bank's approval, everything is smoother.

In short, if you have the time and patience to wait 45-120 days to close on a short sale, knowing that the whole thing could fall apart at any time, then you have the stamina for dealing with short sales (and saving a lot of money in the process). If you need a house soon, and hate waiting for bank responses that take weeks (if not more), stay away from short sales.

If you are thinking about buying a short sale, please let me know, I will guide you through the whole process. Plus you'll get $8000 if you're a first-time home buyer!