Buying a Pre-Foreclosure Home at a Discount – What Are Short Sales?
Are you, a buyer, looking for a great deal on a house? Do you want to buy a house at a pre-foreclosure savings sale price? If so, buying a home that is a short sale might be the ticket, but know first that short sales are not for all buyers.
A short sale happens when a sale price is not enough to pay off a mortgage and the seller is in financial hardship and can’t make up the difference. This sale would be short of paying off the mortgage and is called a short sale.
A short sale is anything BUT short when it comes to the time it takes to close one. When it comes to the time to close on a short sale, they should actually be called a long sale…or maybe even an endurance sale! You need patience.
Buying a home that is a short sale might be the ticket, but be sure you know what you’re getting into
What You Should Know Up Front
Not all short sales close, and the ones that do close can be frustrating experiences. You need to know up front that at most times you will have no control, and the bank will have all control. The bank will dictate rules for you to follow, and then do whatever it so pleases, whenever it pleases.
If you have to have a home in a specific time, do not do a short sale. There is no way to tell when you will close on a short sale. Some loans require a home be in good condition and many short sale homes don’t pass the test, but there are some great deals to be found in short sales. You just have to know it’s really the bank’s game and be willing to play in their ballpark.
Steps to Follow
Knowing the steps in a short sale and understanding how they work will help you on the road to closing on a short sale. Here are the steps in a short sale:
1. Meet with a lender first – you usually need to submit a pre-qual or pre-approval letter with your offer. If paying cash, you will need to submit proof of funds, so have that ready.
2. In viewing properties, don’t exclude homes that aren’t distressed properties. Sometimes, the best deals are found with a seller that has equity in the property and is motivated to sell. The closing process is way easier also.
3. Remember that you will be taking this property “as is,” and if you are getting a loan, it must be able to qualify for the loan. Some homes will only be able to be bought with cash. Finally, some homes are stripped of appliances, so you may need a budget for replacing these.
4. When you have found a property, consult with your agent and make your best offer first. A good agent will talk with the listing agent and find out details on the seller (taxes due, liens) before writing the offer. The offer will first go to the seller, who will usually accept the offer unless it seems impossible for the bank to accept. After the seller accepts the offer, the contract goes to the bank.
5. Now the wait begins. Your agent should pull up a title report at this time to see what liens and taxes are pending as you will be responsible for these. If it is a condo, you will also need to know about any HOAs due. Bank response time can be one week to several months. When you do hear from the bank, you may get an email from the listing agent saying the bank would like to counter your offer, or may even say they are accepting it. Don’t get too excited yet. Until you have the bank’s written approval letter, you have nothing. I had one short sale where the bank countered my buyers in emails twice after they had accepted each previous counter, and if the seller has a 2nd lein holder, you will have to wait for approval from that bank also.
6. The bank’s written approval starts the clock on closing. Usually, you have 30 days to close and your contract has all dates referenced to the bank approval date. Now you need your loan approval to FLY! Please don’t try this with a mainland lender. This is the time for a local lender.
7. Get to know the property. Even though you are buying “as is,” now that you have approval, you will want to do a home inspection, termite inspection, document review, and maybe staking/survey. These will all be at your cost and need to be done quickly. You do have these in your contract as contingencies to cancel if you find something of concern.
8. You will receive from the seller a standard Hawaii seller’s disclosure statement detailing any known problems with the property. This is one major advantage of buying a short sale vs. a REO because a bank does not provide a disclosure to you.
9. What’s in the seller’s closet? When it is time to sign your closing documents, you will receive a HUD 1 that will show any payments you pay that the seller was behind on or other liens. You should have seen all of these previously in the title report. This is the one major area of buying a short sale that you need to consider.
10. Now it’s time for the seller to sign off on seller paperwork. Sometimes the bank will ask the seller to pay in and the seller will refuse or be unable to pay, and the sale ends there.
11. If all goes well after signing, the sale will record. What could go wrong at this point? Believe it or not, there have been stories of large banks foreclosing on homes just prior to them closing on a short sale. One department not knowing what the other was doing. But, you have played the bank’s game…and you are a winner! Congratulations on the successful closing on your short sale!
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