Should I Buy a Short Sale?
The Truth About Short Sales
We are often asked by home buyers about Short Sales and what is involved in buying a home listed for sale as a Short Sale. So, we thought it would be helpful to share the guidelines we give our clients about these often tricky and tenuous transactions. This is the hard truth about short sales and we urge you to keep ALL of this in mind…
First, what is a Short Sale?
A short sale is when the owner of the home is asking the lender to allow them to sell the property for less than the full amount owed the lender. Perhaps they’ve been paying their mortgage for years but the recent recession has simply devastated their equity and the home’s value. They’re “under water” with the home. Some sellers have 2 loans on the property so the seller will be asking both lenders.
In order for the bank or lender(s) to approve it to be sold as a Short Sale, the homeowner has to show a hardship and show that they do not have the assets to pay for the home any longer. The lender is basically expecting the seller to be broke at the time of the short sale. And often the bank will NOT approve it.
Sometimes, when there is a first AND a second mortgage on the home, one lender may approve the short sale while the other will not.
How does a Short Sale actually work?
Only about 25 percent of short sales actually close. Why?
The paperwork that a seller has to submit to the bank or their lender is very intense and may even be overwhelming. Many sellers fail to do this properly and their offer to “short sell” the home actually can’t be submitted to their lender without a hardship letter and the correct paperwork.
It takes almost three months to get all the pieces in place to get an approval from the lender(s). Once the package is put together, it is uploaded to the bank by the listing agent chosen by the homeowner to sell the house.
After about five or six weeks, the listing agent is contacted (often for the first time) by the lender(s) to verify that everyone is still in place ready to sell and buy. This initial contact can take even longer.
The lender will then order the appraisal to check the value of the property and to make sure that the listing agent has properly priced and listed the property. Then, they start negotiating with the seller to get a cash contribution or promissory note from the seller and the seller decides what to do next.
Lenders use the following calculations to determine how much they are willing to accept as an offer from buyers (and they rarely deviate from this formula) to do a Short Sale:
- Short sale offers should be very close to the fair market value; 15 percent of Fair Market Value determined by appraisal + 6% commission + any taxes, HOA fees, liens etc… So the home is sold at 92 percent +/- of fair market value.
- Closing costs rules: The rules are based on the type of first mortgage the seller has that is being shorted and the type of loan the buyer is getting. The listing agent really should know what type loan the seller has. But realize this; if you’re a buyer and you need a lot of closing costs to help you get a loan, a short sale is probably not for you.
- Seller Loan Type: Conventional – the lender will often pay up to 3% with a fair market value offer
- VA – the lender will pay up to 3% with a fair market value offer
- FHA – up to 1% IF you are getting an FHA loan. If you are getting a conventional loan or a VA loan, the lender will pay NO closing costs. None!
What about repairs on a Short Sale as part of the deal?
Lenders expect the seller to be basically broke at the time of closing. So, the seller really can’t make any repairs. And their mortgage company or lender do not make repairs. You’re buying the house “as-is.” You can get the home professionally inspected, which we definitely recommend. But if you don’t have the money to make repairs, a short sale is not for you.
What else should I know about buying a short sale?
- Termite Letters: Lenders do not pay for termite letters.
- Home Warranties: Lenders do not allow home warranties to be paid by the seller.
- Remember, the seller can’t make any additional concessions per lender requirements.
- Close Date: Close dates need to be at least 90 to 120 (sometimes 150 days) from the time of offer. So, if you need to close quickly, a short sale is not for you.
“Short Sale” vs. “Bank Approved Short Sale”
Because this process is so arduous, we recommend buyers only seriously consider those homes listed as an “approved Short Sale” or a “Bank-Approved Short Sale.” Listing agents will often put this in the listing online for the public to see or at least as private remarks in the listing for other agents to see.
This means the seller has successfully navigated all the paperwork explained above and has been “approved” by the bank or lender to go ahead and sell the house for less than they owe on the mortgage. It means the house has a shot at actually selling and closing! But it also means the bank or lender has set the price and they’re usually firm on that number. If the home is NOT an approved Short Sale, your offer may languish in limbo for months and months with no word back. Not fun.
When IS a short sale a good idea for you as a buyer?