Seven Rules for Short Sale Shoppers

Provides practical guidance for homebuyers or new investors who are in the market for short sale (preforeclosure) properties.

When you see a property advertised as a short sale, that usually (but not always) means the home is in preforeclosure and the owner and their real estate agent are listing the home on the market for less than what is owed to the lender (and often less than market value). The agent usually lists the home significantly below market value to generate interest in the property and get a contract on the home as quickly as possible.

Buying a short sale will generally require the same procedure as buying any other home–with the exception of an auction property. Once you identify a property, you will need to have a contract written up by your Realtor and presented to the listing agent. The contract will usually contain some special addenda, at least one of which will indicate you are accepting the home as-is. The listing agent will then submit your offer to the bank for approval. This process could take anywhere from a few days to a few weeks, it varies from bank to bank. The bank may choose to accept, reject, or counter your offer with a higher ales price. After you’ve reached an agreement and the contract is ratified, the sale will usually proceed normally.

While short sales are great opportunities for buyers to get a good deal on a home, the short sale process isn’t always easy. So, if you've fallen in love with a short sale property, here are seven practical guidelines that will help make your process go as smoothly as possible.

Rule 1: Never Fall in Love with a Short Sale until after you have gone to settlement and the keys are in your hand. Banks essentially maintain a right of refusal throughout the entire transaction. Just because you put a contract on a home and it was accepted by the bank, and you paid your inspection costs and for the appraisal and started measuring for carpet, does not mean the bank won't cancel the transaction before closing. Why? It’s business. A cancellation of your deal may mean the bank would recover more money by foreclosing (because of private mortgage insurance) than by proceeding with the short sale. It doesn’t always happen this way, but it happens often enough that you should be aware.

Rule 2: Be Patient and Be Prepared to Submit Multiple Offers on Multiple Homes. Because the prices are so low on short sales, there's likely to be lots of competition and bidding wars when you submit an offer, especially when the home is in good condition. The likelihood that you would get the very first short sale home you like has about the same probability of a second virgin birth. You didn’t think you were the only one to notice the house was in good condition and really cheap, did you? Be patient with your Realtor and the process. Unfortunately, the process is often “hurry up and wait.”

Rule 3: Keep your Expectations Regarding Price Reasonable. Despite the state of the economy, banks are still not just giving homes away. For a bank to make a deal with you, it has to make good business sense. Banks generally won't give a home away at any price just to be rid of it …at least not yet. You can get a good deal, but it may not be as good as you perceive. Trying to get a $700,000 for $300,000 is probably not going to happen, even in this market. But to walk into a home with $25,000 to $50,000 (or sometimes more) in equity is pretty good by most standards. Many people who bought brand new construction last year are already in upside down mortgages. Ask them if they’d like that $50K in equity, and I’d bet they’d take it in a New York minute.

Rule 4: Ask for as Little Closing Help As Possible. While some banks may offer some closing help, acceptance of your offer will usually go a whole lot smoother on a short sale if you have financing that requires minimal seller concessions. The more money you can take from your own financial accounts for your down payment and settlement costs, the more likely the bank is to accept your offer. However, if you require closing and down payment assistance, it may be wise to add the necessary amount on top of the sales price. Have your Realtor conduct a market analysis to ensure your offer will bear the higher price. Also, some banks will not permit more than 3 to 6 percent in closing assistance, however, so have your Realtor check with the listing agent to ensure there are no limits on closing help before submitting an offer. That will save you time and unnecessary anxiety.

Rule 5: Minimize the Contingencies in Your Contract Offer. From the bank’s perspective, the best offer will probably be the one at or above asking price with no financial, inspection, or home sale contingencies. Lots of contingencies means it will take more time to consider. If you have to sell a home or you want to do a home inspection, these requests will usually send your offer lower down the totem pole, particularly if there are multiple offers. So keep them to a minimum.

Rule 6: Give the Bank a Deadline and Keep Shopping until You Get a Response. This is particularly for people who are in a time crunch. Getting a response from a bank can be the beginning of one long beauracratic nightmare--and you can only submit one offer on one property at a time. This is a buyer's market, and there are too many properties out there to tie up your time. If they don't get a response back to you within a reasonable time period, then you should withdraw your offer and go to the next.

Rule 7: Ignore Rule 5 When it Comes to Home Inspections. You should always reserve the right to have a home inspection on the property - even if for informational purposes only. I usually write contracts for my clients in such a way that they will accept the property as-is but only after an acceptable home inspection. If the home inspection is not satisfactory, they can still walk away.

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