If you’re shopping for a home with a bargain-basement price, a short sale could be the answer.
This is where a lender allows borrowers who can’t keep up with the mortgage payments to sell their home for less than they owe on the property. The bank or mortgage company approves what you paid to purchase the home and forgives the remaining debt.
How low can you go and still expect a lender to approve the deal?
Lenders usually will accept offers that net at least 82% (after expenses) of the home’s current fair-market value, regardless of what the borrower owes. When there is a 40-50% reduction in price, this does not matter.
Why would a lender do that?
Because lenders will lose less by allowing a short sale to occur, than by going through a foreclosure on the home.
Taking advantage of a short sale is less risky then buying a foreclosure, because so many repossessed homes need tens of thousands of dollars’ worth of repairs. The worst of the bunch have been deliberately vandalized by angry owners just before they were evicted.
Here are 4 smart moves for buying a short sale property:
Smart move 1. Make sure you’re a good candidate for a short sale.
Short sales are all about presenting the lender with a deal that can’t be refused. Banks and mortgage servicing companies are more likely to approve buyers that:
- Have a substantial down-payment.
- Have been preapproved for a mortgage.
- Place no contingencies on their contract, such as having to sell their current home before proceeding with the purchase.
Smart move 2. Hire a real estate agent who’s experienced in short sales.
You need someone who can steer you away from short sales that aren’t likely to succeed.
I will interview the listing agent to determine whether the seller has done everything that’s needed to win lender approval, in addition to and most importantly, finding out what is necessary to put you, the buyer, in the number one position.
You need to know whether the home has been aggressively marketed — the bank won’t like it if the seller hasn’t made a good-faith effort to get a reasonable bid — and whether the bank has received a broker’s price opinion, which it will use to determine the home’s market value.
Smart move 3. Offer the right price.
Short sales aren’t the time or place to do a lot of dickering. There is competition for these properties, even more so than bank-owned homes that are in great condition. The difference between the two types, is that short sales will always end up going for less than a bank-owned property.
Lenders don’t have the time or staff to evaluate an endless bunch of bids, each a little higher than the last. If you deliberately lowball a bank or mortgage company, it will just write you off as a waste of time.
You need to come up with a cheap but reasonable offer that the bank or mortgage company will accept, in one try and in a short sale. The agent representing you should be doing the work to make sure you get the best deal. Most of the time on properties that I sell as a short sale, the price accepted is one of the lower offers.
Start by estimating the fair-market value of the home for yourself, using comps (values of comparable properties that have sold near the home in the past few months), then collaborate with your agent for the highest and best offer to submit.
Take the condition of the home into account and reduce your estimate if the home needs repairs. It’s a buyer’s market, and you don’t have to treat a fixer-upper like it’s in pristine condition.
Calculate 90% of the home’s value, throw in a few thousand dollars to cover the lender’s cost of doing a short sale (ask me, your agent, what that typical is for your area), and you have a good starting point.
Now look at the quality of your comps.
If it’s a straightforward deal, and the home has spent no more than three or four months on the market, then you’re good to go. There are variables that can go with this that I can explain for you when we meet.
But if all of the comps are foreclosures that sold within a few weeks of hitting the market, then those may be damaged homes being dumped at fire sale prices, so further investigation is necessary.
You’ll have to adjust your offer upward, perhaps all the way to the full fair-market value calculated with those comps in most cases, but sometimes there may be a quick steal in sight and I can get it for you.
Check how close your offer is to the asking price on the home. Remember, the sellers won’t get any of the money, so they have no incentive to demand an unreasonable price. But unfortunately, sometimes there are unreasonable sellers and I can help get them to be co-operative, even though I am not representing them, to put the price at what you want to pay which will ultimately help the agent representing the seller get the bank to do the same.
They’re just trying to find a price you’ll pay, and one the bank will accept, to relieve them of their debt, but I have a knack for getting the seller and seller’s agent to realize what is necessary in doing the transaction because I have dealt with countless lenders while knowing their tendencies.
From the your perspective, given your agent’s guidance, you’ve probably come to the same conclusions as the seller and their real estate agent, but unfortunately this is not always the case. It is not about the seller deciding the price; it is about the lender’s decision, while being guided by the real estate agent. If the listing agent or their hired negotiator are not experienced in handling the process, I take care in making sure the seller’s agent understands the approach and if the agent isn’t doing the negotiating, then I will speak with the person the listing agent hired and show them how a short sale can be successful.
Smart move 4. Be patient.
It almost always takes longer to close a short sale than a typical sale of a property, because it takes so long for lenders to review and accept your proposal.
There are deals closing in as little as five weeks when the lender has preapproved the short sale and asking price and you agree to meet that price.
But that rarely happens, however, when you hire an agent like me those results go way up!
More often than not, it takes two to four months to get a “yes” from the bank or mortgage servicing company.
Although lenders say they’re trying to process these requests more quickly, there still is a problem because of the lack of knowledge or contacts by the listing agent within a bank that I can help expedite for you the buyer.
Bottom line, buying or selling a property in today’s market requires a skilled and experienced agent. There is money to be made by sellers even if you are upside down (banks are offering special incentives or thousands of dollars to sellers that most agents do not know about) and discounts to be gotten by buyers, but only with the “RIGHT AGENT”. Call me TODAY!
I’m available at (619) 890-3648 or via email.