What is a "Short Sale"?

Properties that are in foreclosure with little or no equity are available for purchase from banks and other lending institutions; that is, homes where the seller owes at close to or more than the property is worth. In these situations, lenders are sometimes willing to accept less than the full amount due, commonly referred to as “short pay” or “short sale.”

 

Advantages for You

The biggest advantage to you, the investor or buyer, is to obtain a home that is priced at below-market-value and owned by a motivated seller (the owner in trouble or the bank). Generally, the home needs repair (often simply cosmetic), which means that with a little elbow grease on your part, you can quickly regain some of the hidden equity and suddenly own a home that is worth more than you paid for it. If you are willing to do the legwork (and the handiwork), a short sale may be ideal for you.

Advantages for the Lender

From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney’s fees, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. Your job as the investor (and my job as your agent) is to convince the lender that it will fare better by accepting less money now.

What the Lender Needs to Know

The lender will want some information about the property, the borrower and the deal he has made with you. Specifically, the lender wants to know what the property is worth. The lender might hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition you will want to offer as much specific negative information about the property as possible. Also, include some relevant information about the neighborhood and the local economy if things are bad (copies of newspaper articles with “bad news” may help). A contract’s bid for repair estimates should also be submitted, which, of course, should be the highest bid you can obtain!

The lender will also ask for financial information about the borrower. Sort of a backwards loan application, the borrower must prove that he is broke and unable to afford the payments. The borrower must show that he has no other source of income or assets to repay the loan. This process may involve as much, if not more paperwork than an original mortgage application! The borrower should submit a “hardship letter”, which is basically a sob story about how much financial trouble the borrower is in. This may require a little literary creativity, and some help on your part. Don’t lie, just paint a picture that doesn’t look good.

Finally, the lender generally wants to see a written contract between you and the seller. The lender wants to make sure the seller isn’t walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender. A preliminary HUD-1 settlement statement is often requested, which can be difficult, since many title and escrow companies simple won’t prepare one in advance of closing. We can prepare your own HUD-1, and simply write “preliminary” on the top.

Possible Bumps in the Road

Negotiating a short sale with the lender can be tricky, generally because it is a daunting task finding a bank officer who has the authority to accept a discount. This is why you need the help of a trained John L. Scott agent such as myself. On your behalf, I can call around to locate the lender’s “Loss Mitigation Department” (this can take some effort getting to the right person). Then the negotiation begins.

Don’t be surprised if your first short sale bid is rejected. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you a steal. Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes – if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value.

The process of the short sale has special requirements, but may be worth it for an investor or first-time home buyer who is not intimidated by the repairs that must be made to an “as-is” home.

We're here to help if you are interested in snatching up one of these deals! Call us at 425-413-6428 for a list of available short sale homes today.