Buyers Making the Short Sale Purchase Decision
by Karina Gafford
MilitaryByOwner staff writer
In recent years, the real estate market has changed considerably, making the purchase of distressed properties—short sales, REOs (Real Estate Owned), and foreclosures—an increasingly large component of the market. In fact, such a demand for distressed properties has grown to necessitate the parallel growth of entire segments of the real estate professional industry that specialize only in dealing with those properties. Unlike the purchase of either a new or conventional resale of a home, the sales of distressed properties involve a significantly different process. Depending on which type of distressed property you plan to purchase, not only does the transaction involve a buyer and a seller, but also a third party—the mortgage servicer—and often a fourth party—the investor or the lender’s financial backer—the VA, Fannie Mae, Freddie Mac, Ginnie Mae, and etcetera—that actively participates in the sale, too.
Given the complicated nature of the short sale purchase, prospective buyers should not enter the process lightly. For military families with limited time to engage in the home buying process, it is even more crucial to understand that these transactions are lengthy and complicated. That is not to say, however, that the purchase of a distressed property makes a bad investment; in fact, for those who are frugal or limited in funds, a short sale may just help you achieve your best possible investment. Good things come to those who wait, right?
As the process to purchase an REO or foreclosure have their own sets of rule, for the purpose of this article, we will look specifically at the option of purchasing a short sale in order to help you decide whether the investment would prove a good choice for your family.
What is a Short Sale?
A short sale involves the sale of a home for a price that is short of the amount owed to the mortgage lender. The term "short" unfortunately does not mean that the process itself is short. Working in conjunction with the seller, the mortgage lender must also agree to the sale of the property. Given that the lender will assume the loss on the amount owed, the lender has the greatest say in whether the sale can take place.
Though a short sale is classified as the sale of a distressed property, the home typically remains occupied by the primary resident up until closing. This means that the prospective buyer is not investing in an abandoned property, and so the property generally does not have the same negative issues associated with the sales of other distressed properties.
Advantages of a Short Sale
Advantages abound for those who achieve successful closings on short sales. Those fortunate enough to purchase a short sale property reap the benefit of the distressed sale price of a foreclosure without the headache of assuming the responsibility of an abandoned and neglected property. This means that military families can afford to purchase in neighborhoods that would otherwise be out of their price range. They can then happily move into their (relatively) clean and maintained home on the date of closing as if they had paid full price for a conventional sale in that neighborhood. A short sale can definitely help a buyer get more for less!
The increasing trend in both availability and purchasing of short sales appeals to younger members of the military who could otherwise not afford to enter the housing market in many areas across the United States, too. According to the National Association of Realtors Report, the median single family home price near bases in San Diego is $485,000 while near several US bases in Honolulu it is currently $679,800. The average single family home price across the US was $207,300 as of the third quarter in 2013, reflected a $23,000 average price rise over a period of one and half years. For a young military family, the purchase of a short sale creates an opportunity to enter the market in an otherwise high-priced area.
Further, unlike with buying a foreclosed property that, once abandoned (whether forcibly or willingly), a property can quickly fall into a state disrepair through neglect. In a short sale, however, the house is generally kept in better shape as the homeowner typically remains in the property until the closing date.
Disadvantages of a Short Sale
While buying a short sale home offers many advantages, the benefits come at a cost.
The process, for one example, is tedious. In a conventional sale, the negotiation and approval usually takes place over a period of 24 to 48 hours, but this is not the case for a short sale. First, the seller must approve the offer. Then, the lender must approve the offer, too. From the moment that a buyer puts forth an offer that is accepted by the seller, the process can then take a couple of months while the lender determines whether to approve the offer. If the offer is too low for what the lender appraised the property, the process will start over again.
Buyers must put forth their best, and not lowest, offer first. In the case of a conventional sale, buyers will often initiate negotiation with a low offer in the hope of achieving a price below the seller’s asking price. In the case of a short sale, however, it is in the interest of the buyer to put forth his best offer first to avoid losing the opportunity to purchase the property. If the seller receives multiple offers, he will submit only the best offer to the lender. If the lender rejects your offer because it was too low, the seller may be hesitant to submit a second offer of yours to the lender.
Furthermore, a buyer intent on purchasing a short sale should expect to have to spend money on updates once in the property. This assumes, though, that the inspection showed that no structural damages exist and only cosmetic updates are necessary. Buyers should keep in mind that those selling a short sale property may not have additional funds for niceties and updates, such as chrome taps, updated appliances, granite countertops, and so forth. In the sale of a conventional property, a buyer can negotiate for items such as an appliance or carpet allowance, but in a short sale, aside from very basic repairs and leaving a swept clean house, no such allowances exist. The condition of a short sale will generally always exceed the condition of a foreclosed, abandoned property, but it is incumbent on the buyer to recognize the possibility of an immediate need to spend out-of-pocket for refurbishments.
Steps in the Process of a Short Sale for the Buyer
There are a few different processes for short sales depending on whether the lender falls under HAFA (Home Affordable Foreclosures Alternatives), the new standard short sale that features an approved short sale such as those now offered by Fannie Mae, Freddie Mac, and FHA, or the classic short sale route where the seller does not know for sure if the lender will approve any short sale offer.
Generally, though, the process follows a standard order. First, the buyer submits an offer to the seller. The seller reviews the offers received, selects the best offer with the greatest chance of success (usually the highest offer with no contingencies and assured financing), and submits the offer to the lender. Then, the waiting begins. The greatest distinction between each of the short sale processes occurs in this stage where the lender determines whether or not to accept the offer.
Looking first at Home Affordable Foreclosure Alternatives, a seller must determine that not only that the lien on the home is owned by one of the servicers approved under HAFA, but also that they meet the stringent eligibility requirements. Assuming that the seller meets the eligibility requirements, they can then solicit offers. The seller will submit an offer to the lender either with an approval or with an "Alternative Request for Approval of Short Sale" form. The latter will make the process longer as the seller does not yet have official approval for the short sale.
In the case of the new standard short sale, the servicer of the mortgage, meaning the company to whom you pay the mortgage amount, does not have to consult with the third party investor, to determine a seller’s eligibility for a short sale. If the seller is late on payments by 31 days or more, then the seller automatically qualifies for a short sale. If, however, the seller is current on payments, then he can still qualify for a short sale if he meets one of the four eligible hardships. These hardships are: divorce or separation; death of the borrower or the primary wage earner; long-term permanent disability of the borrower or dependent family member; or distant employment transfer or relocation, which includes a PCS for service members. Therefore, before the buyer even initiates the sale, he will know if a short sale is a possibility.
In the case where a seller’s home is not owned by a lender who participates in the Making Home Affordable program, the seller will need to determine if the lender offers any in-house programs as alternatives to foreclosure. The approval process will then vary greatly by lender at this point.
The lender will then choose to either accept or reject the prospective buyer’s offer. If the lender then chooses to reject the offer on the basis that it is too low, then the real estate agents for the buyer and seller can contest the lender’s value of the home. The lender’s perceived worth of the home is based on an appraisal. The real estate agents can contest the appraisal by providing data on the sale of comparable properties in the area. The lender can either choose to accept the new data and take it into account with the prospective buyer’s offer, or it can choose to reject the data; the power in this part of the transaction rests entirely in the hands of the lender.
Once the lender approves the short sale, the real estate agent for the seller receives a short sale approval letter from the lender. The agent then shares this news with the buyer’s agent.
The buyer then has ten days after the offer has been approved to determine whether the home is a still a good fit. He may choose to cancel the sale because the lender denied contingencies, such as funds for requisite repairs to the home, or he may not receive the loan he anticipated in order to purchase the property. If the buyer chooses to reject the purchase of the home, the sale process terminates.
The house then returns to the market; however, the seller and the real estate agent now know precisely what dollar amount the lender is willing to accept. In this event, the house is marketed at the firm dollar amount, known commonly as an approved short sale. Offers that do not meet this pre-approved amount do not get submitted to the lender by the seller unless no other offers arise as the seller will not want to risk the chance of losing the sale again. If you are making an offer on such a property, keep in mind that the seller hopes to divest from the property as soon as possible and will likely not entertain low offers.
Once both the lender and buyer agree to a sale, the process moves quickly to closing. The buyer orders an inspection of the home, which typically costs somewhere in the realm of $200 to $400. A good home inspector is worth every penny, as an inspector will quickly identify any prospective problems with the property, including HVAC systems, water systems, roofing, foundational or structural damages, and electrical systems. Assuming that all is well with the inspection, the buyer then proceeds with financing the property. If the property is a cash sale, the property can close in as little as 48 hours.
To help navigate the complicated process of a short sale, it is a good idea to find a real estate agent with experience dealing in distressed properties. An experienced real estate agent can help make sure that the process proceeds smoothly, and can negotiate on your behalf with the seller’s agent. You find a real estate agent near your home through MilitarybyOwner’s business directory.