With the real estate market across the country slowing down and interest rates likely going up again, real estate short sales might become more common, soon. Those seeking to buy a home might see this as an opportunity.
Before you decide to buy a house through a short sale, you should understand what it is, exactly. Let’s look at what real estate short sales are, how they work, and what you can expect.
What are Real Estate Short Sales?
Investopedia.com defines a short sale as, “A short sale in real estate is an offer of a property at an asking price that is less than the amount due on the current owner’s mortgage.”
Usually, a short sale happens when the homeowner is in financial distress. However, it can also happen if the property value drops significantly. When a property is sold as a short sale, the process go directly to the lender.
The lender may forgive the remaining balance of the mortgage or seek a deficiency judgement, which will require the homeowner to pay the remaining balance.
When real estate short sales become more common, it’s often a sign of a slowing economy. It’s a sign that many homeowners have a mortgage balance above the current value of their home.
How Real Estate Short Sales Work
The short sale process can be broken down into a few steps:
Step #1 – Complete the Short Sale Package
You will get the process of a real estate short sale started by sending the sender authorization in. It’s necessary to gather documents and sent in a third-party authorization to the foreclosing lender to get a short sale package, reinstatement figures and the payoff.
It may be necessary to follow up with different documents during the process. Of course, once the short sale package arrives, you will need to complete it and send it in.
The short sale package will include most, if not all of the following documents:
- Comparable sales
- Cost estimate for any repairs
- An offer letter or overview send to the lender
- Financial statements from the borrower
- A financial hardship letter
- Income proof from the borrow
- Bank statements from the borrower
- Sales explanation and an offer
- HUD 1 settlement statement
- Sale and purchase agreement
- Buyer’s proof of funds letter
- Power of attorney
If you don’t have all of the necessary documents, you may need to write and sign an explanation of why you don’t have the missing documents.
Step #2 – Follow Up on the Short Sale Package Receipt
Once the short sale package has been submitted to the lender, the lender will take between 2 and four days to scan the information. You can follow up to make sure the short sale package was received, if this time passes without confirmation the package was received.
You may even need to call multiple times to make sure the package was received. Once you know it has been received, you can ask about the timeframe for getting the short sale package assigned to a loss mitigator.
Step #3 – Schedule Your Appraisal or BPO for the Short Sale
During real estate short sales, the lender will receive your offer and requests a BPS or an appraisal. Typically, the BPO will become the most important element lenders will consider.
When you reach this part of the real estate short sale process, expect to face objections. Make sure to find out how long the appraisal or BPO process will take. You can also ask about how long the decision-making process will last.
Step #4 – Educate Your Evaluator
Real estate short sales can end suddenly if you don’t get a good deal or the appraisal comes back too high. If this happens, you can schedule an appointment with the BPO agent or appraiser to present your real estate comps and supporting documents. This education process can help you get a short sale to go through, in some cases.
Step #5 – Start Negations with the Lost Mitigator
When the BPO or appraisal is completed, the mitigator has the decision to counter your offer, decline, or accept. When real estate short sales are accepted, you’ll move to prepare for property closing.
If the offer is declined, you’ll get the chance to plead your case. However, if there is a counter offer, things can go into negotiations.
Step #6 – Gain Short Sale Acceptance
Once you get your short sale accepted, you will start preparing to close. This will likely include providing the right documents to the title company or attorney. It will also include setting a date, having a check for the money owed, and actually closing.
What can You Expect with a Short Sale Home?
Real estate short sales can take between three and six months to complete. You can expect this process to take some time, but it can also be approved within two weeks from some lenders.
If you’re on the sale side of things, it can be an emotional and rough process to go through. It can also have an impact on your credit rating. However, it will be less damaging than going through a foreclosure.
Should You Buy Real Estate Short Sales?
Just like with anything, buying real estate short sales comes with pros and cons. Let’s look at some of the pros and cons that go along with real estate short sales.
Pros of Buying Real Estate Short Sales
- Potential of getting a very good deal – In some cases, buying real estate short sales can lead to very good deals. Many investors will buy these properties for that reason.
- Less Competition – The short sale market isn’t nearly as competitive as the regular real estate market. You will likely avoid bidding wars when you buy a short sale.
- It might be less risky than a foreclosed property – Short sales are often less risky to buy than a foreclosure. The homeowners tend to continue to take care of the property, while a foreclosure can be destroyed.
Cons of Buying Real Estate Short Sales
- Can be a long process – Real estate short sales come with a long process, some times. They can take months to close, but they can also be faster.
- Homes may require repairs – Sometimes, you’ll get a great deal with short sales, but you’ll have to invest some money in repairs.
How to Buy Real Estate Short Sales
If you plan on buying real estate short sales as an investment or just one short sale as a primary residence, you should understand the process. There are three main steps in the process to buy real estate short sales including:
- Get Pre-approved – Unless you plan to pay cash, you will need to get pre-approved by a lender for a mortgage. This pre-approval will give you a better idea of what you can afford.
- Shop for Short Sales – Once you’re pre-approved, you want to start shopping for the right short sale property for you.
- Make Your Offer – After you find the right short sale property for you, it’s time to make an offer.
These three steps are pretty much the same as buying any home. However, once you make an offer, it can take quite a bit of time to get to the closing table. This is not always the case. It depends on the lender, the property, and other factors involved with real estate short sales.
There are some obstacles you might run into, when buying real estate short sales. These obstacles can delay the process and include:
- Multiple Debts are Owed by the Homeowner – If the homeowner has multiple liens on the property, this can make it more difficult to complete the short sale process.
- The Lender Accepts Another Offer – Of course, if the lender accepts another offer, your deal will be over.
- The Seller Cancels the Deal – In some cases, the seller will cancel the deal, if the primary lender asks the seller to cover some or all of the closing costs.
There are other obstacles you can run into with real estate short sales, but these are the main obstacles.
Best Ways to Find Real Estate Short Sales to Buy
1. Use a Local Real Estate Agent
Some real estate agents work with buyers looking for real estate short sales. They know the ins and the outs of the process. Good local real estate agents can be the best source to find short sales.
2. Check Pre-Foreclosure Filings in the Area
Another way to find real estate short sales is to check the pre-foreclosure filings. These listings are often found online through the country clerk office in your area. It’s common for pre-foreclosure homeowners to be good candidates for the short sale process.
3. Check the MLS Listings
You can check MLS listings for short sales. You may have to search for “short sale” to bring up the right listings.
4. Check the ads
In some cases, homeowners trying to find offers for a short sale property will advertise in the newspaper or on Craigslist. These can be places to find real estate short sales.
When you’re looking for the right real estate short sales in Northern Virginia, make sure you work with the right local real estate agent. With the right agent, you can find the best short sales and get the deal you need for your next investment property or for a primary residence.