A Buyer's Guide to Short Sale Listings
If you’ve never purchased a short sale before, or if you have never purchased a short sale using the services of an expert short sale buyer’s agent, then go ahead and read this page first. There’s a lot that you probably don’t know and since The LAMB Group associates have helped thousands of homeowners with short sales, a lot of this information isn’t going to be found anywhere else.
Buying a short sale listing puts you in the unique position to help a homeowner avoid foreclosure and to help yourself to a great deal at the same time. It’s one of those few, truly win-win scenarios in life.
Your Buyer’s Agent should help you choose the listing agent
It probably seems a little odd that we’re discussing listing agents, even on the buyer’s information page. However, the listing agent is vitally important to a buyer, almost as much as to the seller. Purchasing a short sale can be risky to a buyer, especially if the supposed "short sale specialist" listing agent doesn’t actually have the experience, knowledge or resources that it takes to get the transaction closed. Processing a short sale requires skills and staffing that most short sale listing agents simply do not possess and unfortunately, they don't even realize it. If you make an offer on a property that is listed by an agent who doesn’t have the experience to get it closed, you’ll be wasting a lot of time and money on a lost cause. And what’s most unfortunate, is that the right buyer’s agent could have warned you about this from the very beginning.
The LAMB Group has been helping buyers purchase short sales, foreclosures, and other distressed properties for more than 15 years. We began focusing on this segment of the market well in advance of the short sale & foreclosure “gold rush” that occurred in 2007 and we’ll be here long after those bandwagon agents have forgotten about this niche of the industry. We know which agents are able to successfully process short sales and which ones are probably not. An experienced short sale buyer’s agent should always be able to tell you this because the skill of the listing agent is the most important factor to consider before you make an offer on any short sale.
Who actually owns a short sale?
The first thing to remember about a short sale offer is the fact that the property is not owned by the bank. A short sale is still owned by an individual who, for an array of reasons, has decided to sell their home for less than the mortgage balance due. They are not always behind on payments and contrary to popular belief, short sale properties are generally in pretty good condition... especially when compared to their foreclosure counter-parts.
As a result, you have the unique ability to purchase a home directly from the homeowner at today’s market value, which is usually a lot lower than what they paid for it. And, that homeowner is incentivized in some way to close the deal so, they will usually make sure to take care of the property all the way until closing. Finally, if the homeowner happens to be behind on payments and close to foreclosure, your purchase of their property will save that family from financial disaster; thus, making you, in a very real way, one of the heroes who is helping to make the foreclosure crisis in America better... one home at a time.
Because the homeowner (and not the bank) actually owns the property, most of your contracts are between you and the homeowner. Certain mortgage banks and servicers, like Bank of America & Wells Fargo, have specific forms that they require you to sign. But that doesn’t negate the true nature of your arm’s length real estate transaction with another private individual.
The only real difference between a short sale and a regular sale is the “permission” that the seller must obtain in order to sell their home for whatever amount of money that you, as the buyer, feel is fair to offer.
This “permission” comes in the form of an Approval Letter. And the thing which everyone is always waiting for in a short sale is... you guessed it, the Approval Letter.
Making a short sale offer
First things first. We must make an offer before we can get approval and, like anything, there is a right and a wrong way to do this. In fact, short sale offers must be written with a greater level of perfection than any other kind of residential real estate offer. Due to the propensity of fraud, banks are even more detail-oriented with short sale offers than they are with foreclosures.
Many times, the short sale listing agent for the property doesn’t understand this requirement and buyer’s agents almost never understand. It’s not their fault... the bank’s requirements are counter-intuitive and somewhat ridiculous, so if neither of the agents has very much experience (almost no short sale real estate agents do) then neither of them is going to catch the errors.
The problem for you is the fact that these errors will be caught by the bank eventually. But not immediately. You’ll have to wait several months before the bank finally realizes your agent’s mistakes and then rejects your offer over a technicality. This usually forces you to take several steps back in the process and wastes at least 7-15 days’ time. In extreme situations, offer problems can even cause you to have to restart the short sale process entirely.
Before making any short sale offer, if you want to make sure that it’s not rejected by the bank over a technicality, contact one of our short sale specialists today. We’ll make sure that all paperwork is 100% perfect based on the specific needs of whichever servicing company or mortgage bank happens to be holding the mortgage for the seller’s home.
Inspections of the property
One of the most debated topics in the short sale industry is the timing of the property inspection. In a typical real estate sale, as well as foreclosures and most other types of residential sales, the property inspection comes shortly after the seller signs your offer and it becomes a contract. In auctions, the inspections usually must occur even before you go “under contract.”
Somehow, years ago, buyer’s agents began arguing that the inspection process should not occur until after short sale approval is procured from the mortgage bank. They made this argument based on the fear that the buyer’s offer would never be approved and that the buyer would lose the $400 that it costs to perform these inspections.
We can’t say that we blame them for being afraid... the fear that you’ll never get approval is very real with the majority of short sale listing agents. Who knows if they’ll ever be able to do what is necessary to process everything and obtain your approval letter? So, who wants to spend $400 on an inspection when the listing agent may never be able to work things out?
Well, let’s assume that your buyer’s agent has made sure to evaluate the competency of the listing agent and that you’re only making offers on those properties that are listed by experienced short sale agents (as described above), then this fear is no longer as much of an issue.
Then what is the benefit of waiting on inspections? What is the detriment? The benefit is never going to change, you are always, only saving $400 in the event that something bad happens. And in any real estate transaction, something bad could always happen, it’s the nature of the industry. The bigger question to ask is, “What am I getting for this $400 risk that I’m taking?”
Let’s answer that question by asking a couple of others...
How valuable is your time? Well, if you wait 60-90 days for approval before you inspect the property, you may find a huge structural issue and realize that you can no longer purchase the home. Then, you have been waiting for 3 months for absolutely nothing, and you have saved nothing as well. Remember, in this (very common) scenario, you ultimately inspected the property and spent the money for that inspection, no matter what. You simply lost a lot of time for nothing.
How badly do you want the home at a good price? Well, the offer you make today can be dramatically influenced by inspections. What if that same foundation issue wasn’t something that totally changed your mind about the home but instead simply made you realize that it was worth less money? Wouldn’t you want to reduce your offer because of something like this? Well, if you inspect in advance, this is completely possible and your reduced offer is even more likely to be approved by the bank. If you wait until after your purchase price has already been approved by the bank, then your chances for obtaining a reduction in price, even if you find structural issues, are less than 25% of what they would have been, prior to approval. Again, by waiting, your chances of buying the home at a reduced priced have been dramatically decreased, and you have still spent the same amount of money on short sale inspections.
How badly do you want your offer to be approved at its current price? Let’s assume the foundation crack was obvious to you from the start. And you don’t need a home inspection to tell you that the chandelier is missing or that the tub faucet isn’t working. You noticed all of these things, the home is obviously a fixer-upper and your offer already reflects the work that must be done. In situations like these, inspecting the property first will professionally document every single issue that YOU already noticed... And, if the listing agent is doing a good job then they will be able to use your home inspection report to prove to the bank that your offer is justifiably lower than market value; thus, it will be a lot more like to be approved. With an inspection report from a licensed home inspector, the argument for your offer amount is not nearly as convincing and approval is not nearly as likely.
So, as you can see, there are a lot of great reasons to do a home inspection as soon as you go “under contract” in a short sale. And there’s only ONE reason not to do one – you’ll save $400. Come on, buyers! You’re spending $100k, $200k or more on a piece of real estate. For the chance to save 3 months of time or tens of thousands of dollars, you can’t risk $400 bucks? Of course you can and when most buyers are intelligently confronted with the obvious benefits of inspecting the property first, they are happy to make the investment. Because it’s really the only thing that makes any sense for anyone in a short sale transaction.
Short sale negotiation period
So, you've done your inspections and the home checked out. Or perhaps it didn’t and you have amended your offer to a lower price as a result of some major repairs that you found; either way, that’s done. And now, it’s time to wait for your short sale approval.
During the negotiation period, the bank must make sure that the homeowner has a valid hardship, make sure that your offer is competitive and representative of market value (or adjusted market value), and then, to ensure that there is no fraud associated with the sale. For example, you can’t purchase a short sale from a family member, simply to allow them to remain in the home with a lower mortgage balance.
Once all of this review has been completed, and assuming that your offer meets their requirements, they will issue an approval letter. If they do not, they have the ability to reject the short sale or to counter your offer and ask for more money. This counter offer process works in much the same way as a typical seller/buyer negotiation.
Once the two parties (you and the bank) can agree on a price, things move forward. If you cannot, they don’t. As a footnote, the seller must agree on all of this, as well. However, the seller almost never argues when the bank and the buyer agree. The seller doesn’t really care what the terms of the sale are – their primary goal is generally closing the short sale at any price or terms, no matter what.
Closing a short sale
Once the approval letter has been received, it’s time to close. The process from this point is almost exactly like a normal real estate transaction with very few differences for the buyer. The only thing to pay particular attention to is the closing date. Closing is generally not something that you want to delay in a short sale. While it is possible to obtain an extension of the closing date from the short selling bank, it is never guaranteed and the consequences of them not approving an extension request can be pretty severe to both you and the seller. It’s not worth the risk – always close a short sale on time.
After the closing, you get the keys to the property and you’ve now made a great investment while becoming someone’s hero at the same time. Congratulations!
Let’s get started!
For truly comprehensive buyer representation during the purchase of your next distressed property, whether it’s a short sale or a foreclosure, call The LAMB Group. Although we’re one of the largest short sale processing firms on the east coast, we do not “warehouse” random novice real estate agents. Every licensed agent with our firm is a true expert in this field, and we’ll make sure to support your purchasing goals with the absolute highest level of representation, no matter what.