Oct. 20, 2016

Short Sales: Learn How to buy a Short Sale Property

Now that we understand what is a short sale property is, we'll continue on with these types of properties with Learn How to Buy a Short Sale Property. Buying a short sale properties can be complex, cumbersome, patience testing, confusing, vague and frustrating while seemingly never ending. However, short sale properties also offer advantages, like a good deal.

So, in How to Buy a Short Sale Property we'll be discussing terminology, the parties involved, how to submit a offer, and the closing process.

Short Sale Terminology

Short sale properties have there own set of terminology and real estate terms that are not as common, or not used, in traditional equity based real estate sales.

  • Distressed Sale: A sale of a property when the seller is under extreme pressure to sell. A common distressed type is if the seller is no longer able to make the loan payments to keep the mortgage in good standing.
  • Approved Short Sale: The lienholder has approved, in writing, the seller's request to sell the property for less than is owned against it.
  • Not Approved Short Sale: A short sales that has not received lienholder approval.
  • Short Sale Negotiator: A person, or company, that negotiates the short sale process on behalf of the seller or lienholder.
  • Deficiency: The difference between the property's current market value and how much it is selling/sold for.
  • Debt Forgiveness: When the lienholder forgoes collecting the deficiency stemming from the short sale.

Short Sale Parties

  • Seller: The party who has legal title to sell the property.
  • Lienholder: The party who hold the note against the property.
  • Buyer: The party who wants to purchase the property.
  • Listing Agent: The licensee who represents the seller.
  • Selling Agent: The licensee who represents the buyer.
  • Short Sale Negotiator: Either the party who represents the seller in negotiating the short with the lienholder and/or the party who works for the lienholder as a negotiator in a short sale department.
  • Lienholder: The party who holds interest in the property's note and who typically the seller makes loan payments too.
  • Lender: The party who represents the buyer and manages the buyer's loan approval and loan documents.

How to Identify Short Sale Properties

From the outside, a short sale properties looks like any other home or property; however, on the money side the difference appears. Already know, a short sale is defined by the seller selling the property for less than owed against it and our website allows users to search specifically for short sale.

Here are links to specific short sale property pages to make searching easy.

How to Submit a Short Sale Offer

After identifying the right short sale property, its time write a purchase and sale offer. In the past, I've had clients wanting to conduct their negotiations verbally to "narrow down the details". Thinking it will save time, it doesn't. In addition, only a written offer can be accepted, or countered, creating a mutually accepted purchase offer, an enforceable contract.

With the assistance of capable real estate broker, a buyer will write an offer using standard NWMLS forms containing buyer/seller names, offering price, closing and possession dates (more on that to come), legal descriptions, and any additional addendum.

The buyer signs the purchase and sale, the selling agent then submits to the listing agent, and the listing agent presents the offer to the seller. 

A question that commonly arises is: If the lienholder has to approve the short sale then why does the seller need to agree to it? Because, at this time the seller still has legal title to sell the property regardless if it is a short sale or in a distressed situation.

After buyer and seller mutually agree to all contract terms, that purchase and sale contract is submitted to the lienholder for approval.

How Long can Lienholder Approval Take?

Experience has shown, lienholder approval can take anywhere between 30 to 365 days, or longer. Why? Approvals can depend on many factors which are not limited to how many lienholders hold interest in the property, how timely is the seller (or short sale negotiator) getting required documentation submitted, and how familiar is the lienholder with processing short sale requests.

FYI: Short Sale Addendums, within a purchase and sale contract, give the seller time to obtain lienholder approval.

Also, when writing the purchase and sale, don't make the seller's lienholder approval period unrealistic. I've had clients want to give the seller 2 weeks. While a buyer can do that; however, 2 weeks is no way a realistic time-frame and all parties would be wasting their time writing the contract and submitting the offer.

Different Types Lienholder Outcomes

The lienholder has the final decision which is usually delivered in one of the three forms: approval, disapproval, or counter offer.

Approval: The lienholder agrees to the contract terms which will allow the seller to sell the property to their buyer. Also, in some cases there are changes to the contract terms and commonly the closing date.

Disapproval: The lienholder disapproves with the contract terms and, at that time, the seller isn't allowed to sell the property. Why would a lineholder disapprove the contract? The terms are not agreeable, the seller hasn't provided sufficient evidence of hardship, and/or they're are not going to let the seller sell it short due to some other circumstance or reason.

Counter Offer: The lienholder agrees with parts of the contract enough to where they're willing to write a counter offer. What types of terms are countered? Price, closing date, closing costs ... etc.

What happens if the contract is approved? The buyer and seller can then proceed onto closing as outlined in the purchase and sale contract.

Lender Financing

Wondering why no buyer financing has been discussed till this point? There is a good reason.

Prior to selecting properties and writing a purchase offer, a mortgage lender pre-qualifies a buyer for their financing yet, unlike normal equity based sales, a mortgage lender will not start ordering appraisals, drawing loan documents, disclosing, and have buyers signing documents until the lienholder has approved the seller's request to short sale.

This goes back to How Long can Lienholder Approval Take? section. Until that lienholder approves the short sale, the is no reason for the buyer's lender to spend buyer's money in ordering an appraisal and time with activities if there is no definite answer if the buyer can actually purchase the short sale property.

Once the lienholder approves the short sale, they typically want to close as soon as possible. I've seen as little time as one week. That is usually not feasible since appraisal, disclosure, loan doc prep, and signing schedules all take time.

A typical closing time after lienholder approval is 30 days.

Closing Procedure

Title: Will prepare the title policy as to ensure the title of the property can be insured as it transfers from one party to the next. Recently, I had a title company no issue a title insurance policy since the short sale property was caught up in bankruptcy court and the trustee never approved the sellers right to sell.

Escrow: Escrow will receive all payoff, lienholder approval documents, collect all funds, and verify the lienholder's short sale and other departments are on same page with the seller selling short. In addition, escrow will prepare all the closing documents and schedule buyer and seller signings.

Buyer / Seller Signings: The signing mark a big mile stone in the short sale process as that's when the first glimpse of tunnel's end of can be seen.

Funding: Like equity based sales, the lender will wire the buyer's funds to escrow

Recording: Recording is when all the purchase documents are sent to Snohomish County, electronically these days, and the County records the documents and deed recording the transfer of real property. The County the county then issues recording numbers.

Keys: The final step of a very long process. Once the recording numbers have been release by Snohomish County, then the real estate broker can deliver keys to the new owners. The new owners can then rest easy knowing they have their new home.

Other Considerations

  1. Be flexible with timeliness as there are many unknowns, especially in the beginning.
  2. Continue to shop for properties in the event a comparable property becomes available. Depending how a short sale contract is written, it can be terminated fairly easily.
  3. Its advised the locks either be re-keyed or changed out completely since not all keys maybe accounted for in the property's transfer

Good luck with your short sale search and purchase. If we can help answer any additional questions please leave them in the comments below or send us an email at info@barnettassociates.net.

 

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