Short Sale Tips for Buyers

MLS#: 77468

Most of the information on the Internet about short sales is aimed at sellers, not buyers. To fix that, we have put together the following short sale tips for buyers.

What is a short sale?

A short sale is sort of a pre-foreclosure sale which occurs when the lien holder on the property agrees to accept less than the loan amount in order to prevent a foreclosure.

When would a lien holder agree to a short sale?

Lien holders sometimes agree to a short sale when it costs them less money than a full foreclosure on the property.

Are their risks for a buyer when dealing with a short sale purchase?

There can be risks to the buyer, which is why I recommend that buyers in a short sale transaction contact a lawyer to further protect their rights when entering into a short sale agreement with a seller.

What are some common short sale pitfalls for a buyer?

  • First of all, a buyer needs to understand the meaning of “subject to lien holder’s approval.” A buyer and seller will typically sign the purchase and sale contract before it is sent over to the short sale negotiator.This is the first step and required by MLS rules. It in no way guarantees the buyer or seller of a sale because the transaction cannot move to closing until the lien holder comes back to the buyer with their counter offer. Lien holder may accept the purchase price and terms; however they typically have additional terms that they require the buyer’s agreement. These vary by lien holder.
  • The greatest frustration for a buyer of a short sale is that the lien holder can take 60 to 180 days to come back with that counter offer. Since it varies by lender, it is difficult for the agents to calculate that.
  • Many listing agents require the buyer to deposit earnest money and/or perform home inspections prior to the lien holder’s approval. This essentially locks the buyer in for those 60-180 days while the short sale is being approved. There is no guarantee that the buyer’s offer will be accepted as-is, and the buyer waits for that period of time not knowing the outcome.Therefore, I never recommend that my buyers do either of these, only agreeing to it on a case-by-case study of all the factors involved since we cannot be 100% sure that the home will not end up in foreclosure. At a minimum the buyer can be out the home inspection fees as well as a lot of wasted time and no home purchased.
  • Since a loan to purchase the property cannot be locked with the buyer’s lender for more than 60 days, the buyer also has no idea of what the interest rate will end up being by the time of closing. Who the lien holder is on the property also plays a significant role in how I advise my client.Each lender has a different procedure for short sales and there are a few out there that have streamlined their process for a faster closing.

Where does the listing agent fit into the process?

The listing agent on a particular short sale property can also be very important for a buyer and their agent as well. I have a list of questions that I ask the listing agent in order to determine my buyer’s risk when entering into a contract on the short sale.

  • Who are the lender/lenders servicing the loan?

This is short sale 101; if they don’t know the answer to that question, we may have a problem.

  • Have you closed a short sale with that lender?

As stated above, each lien holder has a different procedure, so it can be a huge plus if this listing agent has done one or more short sale transactions with the lien holder on this property.

  • Have you requested the short sale package from the lender, and has the seller filled it out?

This shows me if this agent is on the ball with the short sale and will stay on top of it.

  • How many loans are on the property?

More than one loan on the property spells trouble and the listing agent is going to have to be skillful in negotiating with both lenders at the same time. Since the lien holder in the first position on home gets all the proceeds first, that can leave the second mortgage lender out creating a potential problem for the seller at the closing table.

  • How is the listing agent going to handle submitting offers to the bank?

This question is a very important one. According to Washington State MLS rules, the buyer and seller must sign off on the offer before it is submitted to the lien holder. If the listing agent tells me that he/she is collecting offers and will be submitting every one of them, I advise my buyer to walk away and don’t bother with this property. It tells me that the listing agent does not know how to properly handle a short sale. Without a signed offer, buyer and seller have no contract at all.

  • How far away from foreclosure proceedings is the homeowner?

There is no way to tell how the lien holder is going to handle a property that has a foreclosure looming on the horizon. In many cases, they decide to let the property go because they simply don’t have the time to deal with all the properties they have on their books. It is important for me to know in order to properly represent my buyer and will save them time and money.

 In order to move forward on a short sale when a foreclosure is looming, the lien holder must submit legal paperwork to stay the foreclosure due to pending sale. I have had some lien holders actually move quicker because the foreclosure was coming closer. So again, it depends on the lien holder. These questions are of utmost important when we are determining whether or not to move forward on a short sale contract for a buyer.

Please feel free to contact us if you have any more questions.

-Vanessa Stewart Designated Broker