A Short Sale is simply a sale of a property before foreclosure for LESS that the owner owes on a mortgage.
In today’s economy, many home owners find themselves owing more money than a house is actually worth. If a homeowner finds them self unable to pay their mortgage for whatever reason (loss of job, divorce, etc.), it is difficult to know what to do. A sale of the house under normal circumstances is not possible because no one is going to pay more than the fair value of the home.
This is the point at which this type of Sale can take place. For sales netting the lender less than he is owed to be a possibility, the following conditions must exist:
- Behind on Mortgage – a home owner must be at least three months behind on their mortgage payments
- Compliant Lender – the lender must support short sales. Some lenders have programs set up for this type of sale or will at least consider this type of sale while others will not.
- Homeowner Agreement – The homeowner must sign a written agreement to allow you to negotiate with the lender on their behalf.
- No Bankruptcy – Seller must not have filed bankruptcy
If these conditions exist, negotiating short sales is potentially possible. In order to increase your chances of being able to successfully negotiate a deal, follow these steps:
- Identify Short Sales Opportunities – The best way to do this is to work with an experienced real estate agent that has experience in foreclosures and short sales. They will know what to look for (high mortgages with low equity) and can save you a lot of footwork. Since you will most likely need a realtor to complete this sale (short sales can be complicated), you might as well make good use of the services for which will be paying.
- Visit the Properties – Just like when you visit a home you are considering for purchase at a Sheriff Sale, you need to take accurate notes of all repairs needed for the property. This information is crucial in negotiating the deal with the bank.
- Research – Complete your research regarding property value. Using property records, research the value of home. Request that your realtor also run a “comp” for the property.
- Liens– Find all liens on the property. Ask the property owner about any liens of which they are aware including the current amounts outstanding. In addition, run a general information search on your county’s website or go to the county courthouse and ask where you can look up title records. This search may reveal additional liens.
- Financing – Secure your financing in advance of negotiating with the lender. The easier you make the deal for the lender, the more likely he is to approve the sale.
- Contact the Lender – This usually involves the “loss mitigation department”. Speaking to the right department is important, because the job of the customer service department, for example, is only to obtain the mortgage payment – not to negotiate a short sale. Inquire about the possibility of a short sale on your particular property and the process by which this is obtained at the specific lending institution.
- Proposal – You need to prepare a very thorough proposal including
- Letter of Hardship – this letter is written by the seller and pleads his case to the lender for why he should be allowed to sell his property for less than owed to the lender. It should include as much evidence as possible – copies of overdue bills, declaration of divorce, shut-off notices from utilities, evidence of unemployment, etc.
- Appraisal – This can either be an official appraisal, or an opinion of a broker
- Repair List – This is a list of all repairs visible including the estimated costs of the repairs. This document is extremely important because it is part of the justification for a lower selling price.
- Contract – The realtor will prepare this with the amount you wish to pay
- Negotiate and Finalize – Likely, you will need to negotiate price with the lender once the idea of a short sale is accepted. This process is no different than negotiating any other real estate purchase.
Purchasing homes where a lending institution accepts less than they are owed can be profitable, but it is an intensive process that requires a lot of buyer involvement. If you are willing to put forth the effort, these deals can be an excellent alternative to Tax Sales – not nearly as many surprises!