Below are the must-know questions and answers if you are considering the possibility of purchasing a short sale property. Not all short sales are created equally, so it is best to review this information with your real estate agent.
1) What is a short sale? A short sale is when a seller is selling “short” of what’s financially owed on the house. The sellers have suffered a “financial hardship”, and they are no longer able to keep up with their mortgage payments. There is a pretty lengthy list of “financial hardships” that can qualify a seller to sell short, but without qualifying for one of these financial hardships, the bank holding the mortgage is unlikely to be approve of a short sale.
2) What is the purpose of a short sale? The purpose of a short sale is to help the homeowner avoid foreclosure. The credit profile impact of a short sale may be less significant than experiencing a foreclosure.
3) Who covers the financial loss (deficiency) in a short sale? If a short sale successfully closes, many times the bank holding the mortgage will realize the financial loss, which is the difference between the mortgage balance and the market value. In some cases, the seller may have to pay some money at closing or agree to an unsecured debt in order to have the short sale approved. If the seller refuses, then a short sale may fall through even if the bank has issued conditional approval for the short sale.
4) What is the benefit of buying a short sale? A buyer can purchase a financially or physically distressed property at a potential discount, while avoiding the risks of buying a foreclosed property. View all MN Short Sales here!
5) How long does it take to purchase a short sale property? Because the mortgage bank has to review, research and approve any short sale, the timeline associated with purchasing a short often exceeds 10 weeks after a purchase offer is first submitted on a property. And there is no required response timeline, making it difficult for a buyer who is bound by a specific timetable to purchase.
6) What are some pitfalls of buying a short sale property?
- If there is more than one lien holder (i.e. mortgage) on the subject property, then the junior lien holders ALL must be in alliance in order for a short sale to be approved. So always be sure to inquire how many lien holders there are on a subject property (fewer is better).
- All short sale (almost without exception) will be sold “as is” and “where is”. The homeowner, by nature of a short sale, does not have the financial resources to make any repairs to the property, and the seller will be walking away from closing with zero sale proceeds in their possession.
- In fact, the seller may have to pay some money at closing or agree to an unsecured debt in order to have the short sale approved. If the seller refuses, then a short sale may fall through even if the seller has conditionally-approved the short sale.
7) How can a buyer increase their chances of their offer being accepted? A buyer can greatly improve their probability of success in purchasing a short sale property if they:
- Seek the help of a real estate agent with specific experience in buying and selling short sale properties.
- Ensure all of the paperwork required for a short sale offer is submitted in a complete and timely manner.
- Communicate to the seller that they can and will wait for short sale approval.
- Provide a strong pre-approval letter.
- Offer a sizeable earnest money deposit (>2% of offer price).
- Submit an offer that “reasonably” reflects the market value of the property.
- Hire a real estate agent that knows how to proactively follow-up with the listing agent, short sale attorneys, and the specific bank’s loss mitigation department.