Short Sales. How To Handle Them?

There is one very important alternative to avoid the foreclosure and that is the Short Sale. A Short Sale is a proven way for a homeowner who owes more than the house is worth to avoid a foreclosure and the subsequent credit hit.
A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

Be aware that the seller will need to be in default, to have stopped making mortgage payments, before a lender will consider a short sale. Also, the seller might have owed more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. It is one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience in that arena. You need an experienced short sale agent.

Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations.
Do your research before making an offer to purchase. As your agent I can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.

If there are two loans, you will probably deal with the second mortgage lender. The first mortgage lender's position is protected by the second lender unless the second lender does not want to foreclose. For example, if a seller owes $200,000 to the first lender and $30,000 to the second lender, you cannot offer $200,000 because it will wipe out the second lender.

The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the lender can be anywhere in the country and certainly not aware of local real estate conditions.

If the package is complete, the Lender will order a BPO, or Broker's Price Opinion, from an independent Realtor. This BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company.

Once the seller has accepted your offer, send it to the lender for approval. You do not have a deal until the lender accepts. Also, send the lender a copy of your earnest money deposit. Do not be surprised if the lender asks you to increase it.
In addition, the lender will want to see that you have your own loan available and you are pre-approved. Send a pre-approval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.

The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. There can be tax consequences but if the Seller is truly in a difficult financial situation they can be avoided - an accountant should certainly be involved in that question. This does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.

Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest or termite inspections. A buyer will be asked to purchase the property "as is," which means no repairs.
It is extremely important that a buyer obtain a home inspection and pay for other types of inspections such as pest, roof, sewers, and septic tanks inspections. Do not waive your right to obtain these inspections and make your offer contingent on approving them.

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