If a home is being sold for below what the current seller owes on the property—and the seller does not have other funds to make up the difference at closing—the sale is considered a short sale. Many more home owners are finding themselves in this situation due to a number of factors, including job losses, aggressive borrowing against their home in the days of easy credit, and declining home values in a slower real estate market.

A short sale is different from a foreclosure, which is when the seller’s lender has taken title of the home and is selling it directly. Homeowners often try to accomplish a short sale in order to avoid foreclosure. But a short sale holds many potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.

You’re a good candidate for a short-sale purchase if:

You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) has to approve the sale before you can close. When there is only one mortgage, short-sale experts say lender approval typically takes about two months. If there is more than one mortgage with different lenders, it can take four months or longer for the lenders to approve the sale.

Your financing is in order. Lenders like cash offers. But even if you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.

You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property—or you need to be in your new home by a certain time—a short sale may not be for you. Lenders like no-contingency offers and flexible closing terms.
If you’re serious about purchasing a short-sale property, it’s important for you to have expert assistance. Here are some people you want to work with:

Experienced real estate attorney. Only about two out of five short sales are approved by lenders. But a good real estate attorney who’s knowledgeable about the short-sale process will increase your chances getting an approved contract. Also, if you want any provisions or very specialized language written into the purchase contract, a real estate attorney is essential throughout the negotiation.

A qualified real estate professional.* You may have a close friend or relative in real estate, but if that person doesn’t know anything about short sales, working with him or her may hurt your chances of a successful closing. Interview a few practitioners and ask them how many buyers they’ve represented in a short sale and, of those, how many have successfully closed. A qualified real estate professional will be able to show you short-sale homes, help negotiate the purchase when you find the property you want to buy, and smooth communications with the lender. (All MLSs permit, and some now require, special notations to indicate that a listing is a short sale. There also are certain phrases you can watch for, such as “lender approval required.”)

Title officer. It’s a good idea to have a title officer do an initial title search on a short-sale property to see all the liens attached to the property. If there are multiple lien holders (e.g., second or third mortgage or lines of credit, real estate tax lien, mechanic’s lien, homeowners association lien, etc.), it’s much tougher to get that short sale contract to the closing table. Any of the lien holders could put a kink in the process even after you’ve waited for months for lender approval. If you don’t know a title officer, your real estate attorney or real estate professional should be able to recommend a few.

Some of the other risks faced by buyers of short-sale properties include:

Potential for rejection. Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted months. Or the lender could make a counteroffer, which will lengthen the process.

Bad terms. Even when a lender approves a short sale, it could require that the sellers sign a promissory note to repay the deficient amount of the loan, which may not be acceptable to some financially desperate sellers. In that case, the sellers may refuse to go through with the short sale. Lenders also can change any of the terms of the contract that you’ve already negotiated, which may not be agreeable to you.

No repairs or repair credits. You will most likely be asked to take the property “as is.” Lenders are already taking a loss on the property and may not agree to requests for repair credits.

The risks of a short sale are considerable. But if you have the time, patience, and iron will to see it through, a short sale can be a win-win for you and the sellers.

* Not all real estate practitioners are REALTORS®. A REALTOR® is a member of the NATIONAL ASSOCIATION OF REALTORS® and is bound by NAR’s strict code of ethics.

Note: This article provides general information only. Information is not provided as advice for a specific matter. Laws vary from state to state. For advice on a specific matter, consult your attorney or CPA.

Reprinted with Permission of the National Association of REALTORS

Banks have been doing this for years however in the past few years they have by necessity gotten pretty good at it.  Although it depends on a variety of factors the completion of a successful short sale can take between 60 and 180 days.  In addition the seller will need to “qualify” for the short sale.

Typically the seller must be in a hardship and will need to provide the supporting documentation and application.  In this stressful time sensitive situation it recommended that the seller have professional help.  There are consequences to selling short and you should be aware of them before attempting it. 

Resources that may help avoid a short sale or foreclosure:

Home Affordable Refinance

HOPE for Homeowners

Home Affordable Modification

Foreclosure Alternatives

The information contained here is governed by the Terms Of Use and is not financial or legal advice.  If you need financial or legal advice you should contact your financial professional and/or your attorney.

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Sean Zalmanoff USA Mortgage

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Brian Magill Expert, REALTORS

While being “underwater” on your home may not spell disaster for some, many face very difficult choices daily in order to pay their mortgage.  So who can blame parents for moving into an affordable apartment or combining households in order provide necessities for their children?

I can site case after case of these responsible families trying to sell their property so they could get out from under the mortgage.  The plan is to get into a home that is less expensive so they can live within their means.  So they listed their property, attempted to work out short sale arrangements with the bank, and competed with the other responsible families to market and sell their homes.  In nearly every case they held on as long as they could, many attempted short sales while others just finally threw up their hands and walked away.  This “responsible” household is now reported as a foreclosure statistic.

With a declining market, high unemployment and a poor economy measures need to be implemented in order to prevent more Americans from finding themselves in a similar situation.  It was reported last week that the HAMP (Home Affordable Modification program) participants is on the rise and growing.  We need to improve and expand this program.  Let’s make a real effort to help our fellow Americans and ease up on any new regulations that may have unintended consequences.  While this program may only provide payment reduction and no mortgage balance reduction, as the rate of foreclosure declines property values will increase.

Inman News offers this report.

The Mortgage Bankers Association Forecast.

There are at least 3 problems with waiting until the end of April to enter into a purchase contract.  There will be more competition in April for the best homes available at that time.  Secondly, the percentage of accepted contracts that successful close has dropped.  Lastly if you are in a position that you must close on the property (under contract in June) or you will potentially lose $8,000, your contingency negotiating leverage is lost.

These issues don’t address the stress of working on a deadline and the sacrifices made in order to meet it.   Real estate transactions are complex and involve many aspects including mortgages, insurance, inspections, disclosures and more.  By properly preparing and working on your own timeline it can be so easy that the hardest part is actually moving your belongings.

If you want to take advantage of the available tax credits act now to avoid the many potential pitfalls of buying in April.  Inventory is currently abundant, mortgage rates are low, and you won’t be in competition with those that are waiting until April to get started.

Outline and comparison chart

That means you have a perhaps once in a lifetime (certainly a once in a long-time) opportunity to buy a home at a discount and finance that home at an extremely low interest rate.  It’s known as Buying Power and today’s first time buyers have it.

Savvy buyers and investors are taking advantage of this buying opportunity.  We are already seeing multiple offers on properties that are priced well or below the market.  Take for example a property that sold for 168,000 just 2 years ago.  It was recently listed at $137,500 by the lender that foreclosed on the property.  There were competing offers.  The property needed clean-up and painting totaling approximately $3,500.  That’s a $27,000 discount from the market high of 2 years ago (more if you don’t mind painting).  Factor a low interest rate on the mortgage and there is additional savings.  If you have seen an increase in your earnings in the past 2 years you can factor that in the equation as well.  Keep in mind that this is just one example and not the normal discount you should expect in the Metro St. Louis market but I used this one to illustrate the opportunities that are available.

The truth about whether a home is a good investment.

Overnight Real Estate Rates Sink Further Inman News

Latest Housing Forecast from National Association of REALTORS

Housing Market Ready to Rebound?

Search the Metro St. Louis MLS database.  Tip: look for properties with reduced prices.

Do I qualify for a mortgage given the tightening guidelines?

The effort — the latest attempt to stabilize prices of bonds backed by residential loans as delinquencies continue to escalate and home prices tumble — will provide financing for JPMorgan Chase & Co.’s acquisition of Bear Stearns Cos. for approximately $270 million, or about $2 per share.

Meanwhile, the central bank could reduce the interest rate affecting consumers and businesses to 2 percent at its March 18 meeting, marking a decline of a full percentage point.

Source: Dallas Morning News (03/17/08)

New York, which prevented insurers from forcing residents to buy car and homeowners insurance from the same company in order to avoid cancellation, now wants to order insurers to set aside their record profits for future hurricanes.

Massachusetts and New Jersey are contemplating similar proposals.

Connecticut’s attorney general accused the nation’s largest reinsurance brokerage of price-fixing, rigging the market to run up profits by forcing insurers to run up rates.

So far, these regulatory and legislative efforts in Florida and elsewhere haven’t resulted in lower prices or guarantees of coverage. In fact, the largest insurers, Allstate, State Farm and Liberty Mutual, all have announced rate hikes and withdrawals from northern shores that have not seen a hurricane in nearly 70 years.

Where will it all end? Is there a chance large insurers will simply refuse to comply and refuse to service states that limit their ability to manage risk?

“There are such large markets that individual companies are reluctant to walk away from that much premium,” says Bill McCartney, insurer USAA’s senior vice president for regulatory policy and the former insurance commissioner of Nebraska. “(But) there is a tipping point. Florida is getting awfully close to it.”

Source: Gannett News Service, Paige St. John (11/02/07)