Are you considering buying a short sale? More and more homes listed for sale these days are short sales and buying one can save you 20 percent or more. However, there are some major differences about short sales that you should know before you make an offer.
Short sales are way for homeowners who are in financial trouble to get out of their mortgage obligations and get on with their lives. They lose their homes and they suffer nearly as much damage to their credit as if they go through a foreclosure. However, short sales are faster today than foreclosures, which can take a year or more. That's a major reason more and more owners are choosing foreclosures. The average foreclosure now takes 587 days from the time the owner defaults until the property is re-sold. It's no wonder families facing foreclosure want an alternative. In the past two years, short sale volume has tripled and they are expected to increase by another 25 percent in 2011.
Short sales make sense when owners owe more on their home than it is worth and they are 90 days or more delinquent on their mortgage. Under those conditions, lenders are willing to take a loss on the sale of the home.
For buyers, getting your offer accepted and then closing on a short sale can be more complicated and takes longer than a normal transaction. The more prepared you are for dealing with a short sale, the more successful you will be.
Buyers need patience, patience, patience. Though they are faster than foreclosures today they are not speedy. Short sales can take six months or longer. When short sales became popular several years ago, most lenders were neither staffed or prepared to handle them. Many lenders dragged their feet because they would prefer not to take the loss, or to delay putting in on their books as long as they can. The greatest problem many short sales run into is the fact that most mortgages today are securitized—bundled with mortgages and sold as securities to investors around the world. Getting approval for a short sale from the actual owners can be mind boggling.
If you're a buyer considering entering into a short sale, don't even think about going it alone. Consult a real estate professional who can answer your questions and help you navigate the process. In recent years, thousands of real estate professionals have obtained special training on short sales. New software platforms help them manage the short sale process, which can be like herding cats.
If you're ready for the challenge, here are six important steps you can take to significantly save time and improve your chances of landing a short sale.
1. Get your credit in order before you start looking at houses. If you're bidding on bargain you'll be bidding competitively, possibly against investors paying all cash. That's tough because when lenders see all cash they also see no risk. Do everything you can to reduce the risk factor by having your credit in tip top shape, putting down as much as you can muster and getting a Pre-Qual Plus letter. DON'T buy anything expensive on credit or be late on a credit payment by even a day until the deal is done.
2. When you make an offer, make a strong one and . Many first-time home buyers put down an earnest money deposit of $1,000, but an amount between 1 percent and 3 percent of the sales price puts you way above the crowd. The minimum down payment for FHA loans is 3.5 percent of the purchase price, and the earnest money is part of that down payment. Some real estate contracts call for the earnest money deposit to be placed into a trust account upon short sale approval. Sellers like to see that buyers are ready to put their money where their mouths are, because it shows that those buyers are committed to the transaction.
3. Do your homework on pricing. Check comparable sales on Realtor.com. Some short sale listings are deliberately priced under market value to attract eager buyers, but it doesn't mean the home will sell at that price. However, many banks will approve a short sale that is priced between 5% and 10% under market. Call the listing agent to find out if there are other offers. If the agent has already received a number of offers, your offer may need to be priced much higher than list price. If the seller has already accepted an offer and sent that offer to the bank, you may be wasting your time trying to buy that home.
4. Shorten your contingency period for inspections. In most states standard purchase contracts give buyers from 14 to 30 days to conduct inspections without jeopardizing their deposits. That means the home is basically off the market while the buyer does due diligence, and the house is not considered solid until that contingency period ends. You will speed up the process and gain a competitive edge if you can line up two or three inspectors in advance and cut your contingency period in half in your offer.
5. Communicate patience. If you're not willing to be patient, don't get into a short sale. It's not enough to be patient, you must also communicate the fact that you are willing to wait on the bank for the short sale approval process. Although it is possible to receive short sale approval within 3 to 4 weeks, many banks take at least 6 to 8 weeks, and sometimes longer, to approve or reject short sales. Be prepared to wait 120 days and to act immediately if approval arrives earlier. The biggest problem short sale listing agents and their sellers face is buyers who walk away. No short sale listing agent wants to work on a transaction for several months only to find out the buyer whose offer was accepted has vanished upon short sale approval.
At the end of the short sale rainbow lies a great deal on a home that would have cost you thousands more if it were not a short sale. Though you may have to wait months to close, your new home will probably be in better shape that it would be if it were a foreclosure and sat vacant for a year or more.