What is a Short Sale?
A short sale happens when the owner of a house cannot sell it for the loan amount, plus fees. If that owner doesn't have enough cash to cover the debt, his/her lender negotiates a discount on an existing mortgage to avoid possible foreclosure. In these cases, you -- the potential buyer -- purchase a home from the seller, with the approval of the lender who is accepting less than the debt owed.
The sellers may not be in default. They may merely not have enough equity in their home to sell it and pay off their debt and fees. If the seller is in default and facing foreclosure in the near future, you will see the term "pre-foreclosure" used.
However, just because the home is listed with a short-sale price and terms does not mean that the lender will accept your offer. The seller may accept it, but the lender has the final decision.
- Preparation: Your buyer’s agent must research the property before you make an offer to purchase. They will find out if a foreclosure notice has been filed and how much is owed to the lender(s). This is important because the seller can receive no money because the lender is agreeing to lose money. It’s important to you because it will help to determine how much to offer. You may not offer the seller money on the side – that’s fraud. In order for a lender to accept the price and terms of a short sale, the investors must agree that they are getting a reasonable amount of money for this home. There is a finite amount of loss the lender will accept.
If there is a first mortgage and a second mortgage your agent will probably be working with the second mortgage lender. The first mortgage gets paid first, so it is the second mortgage lender that will take any loss. Most of the time, if there are two lenders, the short sale becomes much more difficult.
- Documentation: Once the seller accepts your offer, it will be sent to the lender for approval. Include a copy of your earnest money deposit. It is not uncommon for the lender to ask you to increase it. In addition, send your pre-approval letter and several comparable sales that support the price you are willing to pay for the home. Your MABA buyer agent will prepare those for you.
Your offer will be contingent upon the lender’s approval within a certain amount of time and also contingent upon an approved home inspection, wood-boring insect inspection etc. In Massachusetts your lender requires a Title V inspection. Find out if the seller has had this done; if not, you will be responsible. Generally, the seller’s lender will not pay or fix customary items that a seller would. The property is sold “as is,” which means no repairs. Your attorney may need to help craft language that the lender will accept about these matters.
- Your Agent’s Professional Fee: The lender is calling the shots. So, sometimes your agent’s fee is not included in the sale. This will need to be worked out between you and your agent. Since real estate commissions are often included in the sale price of a home, many lenders will allow you to add that fee to your loan, so that you needn’t come up with the cash at closing. Check with your lender ahead of time.
- Advantages: Choose carefully! Some short sales and foreclosed homes are good values and have a significant discount that makes them worth the time and risk. Others are not discounted enough to make them worth your effort. A buyer’s agent will help you separate the deals from the rest.
The other advantage is that some lenders will provide financing packages that are discounted in order to entice you to buy their foreclosed home.
- Cautions: Buying a home on a short sale is not as simple as you may have believed. Purchasing a short sale home is very time-consuming and sometimes frustrating. Very few properties ever close in 30 days; 60 to 90 days is more realistic. Frequently, the lender demands the right to continue to market the property and reserves the right to accept a higher offer. So, you are obligated to wait for this purchase, which still could fall through.
Short sales and foreclosed homes are complicated and risky. You will need the help and experience of both a good buyer’s agent and a real estate attorney to get you through this kind of purchase.