Short Sales

Buying a Short Sale

This is a stressful decision for many families; however, a short sale may be the best solution, short of foreclosure, for homeowners who owe more on their properties than they are worth. Technically, a homeowner is ‘short’ when the outstanding loan is more than the current market value of the property. A short sale occurs when the homeowner finds a wiling buyer and then negotiates with the lender to accept less than the full balance of the loan at closing (typically to avoid foreclosure). Once the buyer closes on the property, the property is considered ‘sold short’ of the total value of the loan. The procedure requires stamina but it can yield favourable results for all. Organization and full disclosure will also help you manage through the process.

In the past it was rare for lenders to accept short sale proposals. With overwhelming market shifts and changes in corporate policy, lenders have become much more willing to work with homeowners in distress. Since a short sale generally costs the lender less than a foreclosure, it can also be a way for the lender to reduce their losses.

To qualify for a short sale, homeowners must prove all of the following circumstances:

  • Financial Hardship
    A situation is causing the borrower to have trouble affording their mortgage.
  • Monthly Income Shortfall
    Basically the borrower has more expenses than income, which will, or already is, preventing them from affording their mortgage.
  • Insolvency
    The borrower does not have significant liquid assets to allow them to pay down their delinquent mortgage.

 

Why Buy a Short Sale?


Buying a property in short sale can be a big hassle, so why consider it? Basically it all boils down to the bottom line – you will usually get the property for a (substantial) discount. Lenders may even be willing to offer favorable financing terms in order to move the process along and secure their original investment. Additionally, the owner in default typically plays an active role in the short sale process, which means you will have their cooperation (unlike a foreclosure).

 

Before You Purchase

When dealing with the short sale process, there are a few things you need to know beforehand:

  • All offers are subject to approval by the lender regardless of the homeowner’s acceptance.
  • Lenders are likely to have their own appraisers evaluate the property, which may affect the potential bargain.
  • Each lender follows its own set of (unique) procedures when it comes to short sales, which can make the process confusing and frustrating.
  • Many lenders require short sales to be “as is” transactions, where credits for repairs are typically not negotiated or allowed.
  • On average, short sales can take significantly more time to close than a traditional transaction, so patience with the process is absolutely essential.

 

Working with Representation
Whether you are a first-time homebuyer or experienced investor, it is always wise to work with a REALTOR® when dealing with short sales. The right professional can move you through the process more efficiently, and guide you through the challenges that commonly accompany distressed sale transactions. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties.

 

Making an Offer

An experienced REALTOR® will be extremely beneficial at this juncture in the buying process. Here are some key factors in a successful offer:

  • Request a written confirmation from the homeowner in default that the lender has received the hardship letter and documents required for a short sale application.
  • Short sales are commonly multiple offer situations. Be sure to factor into your offer that there is likely to be more than just your offer up for consideration.
  • Your offer should always be contingent upon the lenders approval within a set time frame.
  • Use an addendum to outline any contingency terms and conditions. Remember that most short sales are “as is” and a lender will grant few, if any, repair requests.
  • Even though most short sales are “as is”, it is still crucial to conduct a home inspection. You should assess the bargain potential of a property by adding the cost of repairs to your total offer.

This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.

 

Facing a Short Sale

While it is a stressful decision for many families, a short sale may be the best solution, short of foreclosure, for homeowners who owe more on their properties than they are worth. Technically, a homeowner is ‘short’ when the outstanding loan is more than the current market value of the property. A short sale occurs when the homeowner finds a wiling buyer and then negotiates with the lender to accept less than the full balance of the loan at closing (typically to avoid foreclosure). Once the buyer closes on the property, the property is considered ‘sold short’ of the total value of the loan. The procedure requires stamina but it can yield favourable results for all. Organization and full disclosure will also help you manage through the process.

In the past it was rare for lenders to accept short sale proposals. With overwhelming market shifts, and changes in corporate policy, lenders have become much more willing to work with homeowners in distress, and since a short sale generally costs the lender less than a foreclosure, it can also be a way for the lender to reduce their losses.

To qualify for a short sale, homeowners must prove all of the following circumstances:

  • Financial Hardship
    A situation is causing the borrower to have trouble affording their mortgage.
  • Monthly Income Shortfall
    Basically the borrower has more expenses than income, which will, or already is, preventing them from affording their mortgage.
  • Insolvency
    The borrower does not have significant liquid assets to allow them to pay down their delinquent mortgage.

Working with Representation
This is a complex transaction, and if short sale is an option you are considering, an experienced REALTOR® can certainly help you make the best of this situation. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties.

It is also recommended that you obtain legal advice from an experienced real estate lawyer and discuss short sale tax ramifications with your accountant. If you do not know any of these professionals, your REALTOR® can recommend experts in these fields.

Selling Your Property as a Short Sale
If you have determined that a short sale is right for your situation, you need to initiate the process with your lender.

Note: Keep good records! Document all calls and keep photocopies of everything you send to the lender. With so many properties in distress, it is not uncommon for the lender to misplace your file.

Lenders typically have their own pre-determined requirements for short sale application, and may demand a wide array of documentation from homeowners; however, the following steps should give you an idea of the general expectations:

  • Call the Lender
    It may take several phone calls for you to reach the person responsible for handling short sales. Be sure to request the supervisor or manager who can make a decision on your account. They will most likely guide you to their website for a short sale application.

Your lender package may need to include the following:

  • Hardship Letter
    This is a statement of facts, which describes how your financial hardship came about. It makes a plea to the lender to accept the terms of a short sale on your account. Things that might qualify as a hardship include: job loss or reduction in pay, disability, and personal loss. Lenders are not typically empathetic to situations involving dishonesty or criminal behavior.
  • Preliminary Net Sheet
    This is an estimate of the total closing costs which should include:
    • Sales price you expect to receive, or the actual offer you have received
    • All costs of sale (including real estate commissions)
    • Unpaid loan balances
    • Outstanding payments due, including late fees
  • Submit Letter of Authorization
    Lenders will not disclose any of your personal information without written authorization to do so. If you are working with a REALTOR®, lawyer, and/or accountant, you will receive better cooperation by submitting a written consent to the lender, granting them permission to discuss your loan with those interested parties.
  • Proof of Income & Assets
    Always be honest and upfront about your financial situation, disclosing any and all assets. Assets include:
    • Savings accounts
    • Money market accounts
    • Stocks and bonds
    • Negotiable instruments
    • Cash
    • Other real estate property
    • Items with tangible value
  • Copies of Bank Statements
    Explain any unaccountable deposits, large cash withdrawals or unusual checks.
  • Comparative Market Analysis
    A comparative market analysis (CMA) will help the lender evaluate why you cannot sell your property for what you owe on your outstanding loan. Your REALTOR® can prepare a CMA for you, which will show prices of similar local homes that have typically sold within the last six months.
  • Listing Agreement & Purchase Agreement
    If you accept an offer to buy from a prospective purchaser, the lender will require a copy of the offer, along with a copy of your listing agreement. It is important to note that all offers are ‘subject to lender approval’. The lender may renegotiate commissions and can refuse to pay for home protection plans and/or termite inspections. Since a majority of short sales are “as is” transactions, the lender will also likely refuse contingencies for repair and requested credits.

It is important to understand that a short sale can damage your credit score, often appearing as a “settlement” which indicates that you paid less than you owed. As part of the short sale negotiation, you should request that the lender not report adverse credit activity to the credit agencies. Even though the lender is under no obligation to accommodate this request, they may be willing to work with you to minimize your financial damage. You could also be presented with a tax bill for the unpaid debt, which is generally considered as debt forgiveness, or income to you. A team of professionals may be able to avoid or, at the least, minimize these consequences. Please consult and seek professional help with an experienced REALTOR®, attorney and/or accountants.

This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.