The term short sale is one often associated solely with sellers. A homeowner needs to get out from under their mortgage for any number of different reasons, and they decide to sell their property. However, short sales can’t take place if there isn’t an interested buyer. Here is what a short sale looks like from a buyer perspective.
What is a short sale? A short sale is when a home is sold for less than the amount due to the lender after all of the costs of the sale are paid. A home can be underwater (meaning that a homeowner owes more on the mortgage than their home is actually worth) for a short sale to occur, but it can also occur as a result of divorce, a death in the family, or a medical emergency. A short sale can also occur if there are two mortgages. For example, the sale price might be enough to pay off the first mortgage but not enough to completely pay off the second one.
What are the benefits of a short sale for the buyer? Buyers enter the short sale process because, just like any other buyer, they fall in love with a home or property. There are a handful of advantages to purchasing a short sale home, although each comes with a caveat or two that even the most starry-eyed buyers need to know.
A Reduced Price. Short sale homes tend to run at lower prices; however, buyers need to be aware that this does not necessarily mean that the property will be listed at a bargain basement price. The price will be low enough to help the home move quickly, but it also needs to be high enough to satisfy the bank’s broker price opinion (BPO).
A BPO occurs when a bank asks a broker, often a real estate agent, to find three properties that have recently sold and are similar to the one in question. Based on this information, the broker comes up with a range of values and then adjusts that number up or down based on any differences in the properties. The resulting number is an opinion of value and is the number the bank will use for their calculations.
A Motivated Seller. In a short sale, the homeowner and the bank are looking to close out a loan that hasn’t gone well. The bank is hoping to recoup as much of its investment as possible, and the seller wants to get away with as little debt as possible and a decent credit score.
Buyers, though, should realize that the situation may have been traumatic for the homeowner. The seller may know that they need to move, but it is possible that they are not particularly enthusiastic about it. Making the home show-ready may not be their highest priority.
Less Competition. Some buyers steer clear of short-sales. They can be complex, require quite a bit of time, and may not work out in the end. For buyers willing to see the process through, however, this means a wide-open playing field for a dream house.
What are the negatives of a short sale for a buyer?
A Longer Wait to Purchase. Most regular home sales proceed from offer to closing in about 30 to 45 days. A short sale, though, can take upwards of 120 days or more. There is more paperwork, more waiting for approval and inspections, more of everything. For buyers in a hurry, this may prove to be a deal breaker.
Lender Interference. The bank or organization that holds the mortgage may try to negotiate for a higher selling price or ask the buyer to cover the closing fees. Their goal is to recover as much of their investment as possible, so it is not surprising that these are possibilities. An experienced short sale real estate agent can help navigate this situation successfully.
Property Wear and Tear. Short sale properties are often sold ‘as is,’ or they are simply in a state of some disrepair. It’s very possible that as the seller’s financial condition worsened, they could not keep up with basic maintenance. Buyers should plan to hire a home inspector to thoroughly go over the property.
How can buyers prepare for a short sale?
Get an experienced agent. Buyers who have their heart set on a short sale property should make an effort to find an agent experienced in short sales to work with them. As mentioned above, the process can be long and complicated, and the financial institution holding the loan can also get involved. An experienced agent can help guide buyers through these situations and raise their chances for success.
Do a BPO. Buyers will need to make an offer on the home, and while the temptation may be to really lowball, it pays to do a bit of homework. The buyer agent should be able to produce a list of comparable sales in the area, and the buyer offer should be based on these numbers. The bank will want something close to market value and their BPO, which should still be a good deal for the buyer. Mimicking the bank BPO process should bring a buyer offer close to what the bank is looking for.
Get preapproved for financing. The listing agent will put together all the paperwork and submit it to the bank for review. Part of that package will include not just the buyer’s offer, but a copy of the earnest money check, the buyer’s proof of funds, and a copy of the buyer’s preapproval letter.
What is the typical process for a short sale at the bank?
At this point, it is important to remember that the lender is quite possibly a large organization. Large organizations do not move quickly. Small, local banks can be a bit more adroit, but it is best to be prepared for a somewhat lengthy process. Here’s a general outline of what happens once the package lands at the bank.
- Once the bank receives the package from the listing agent, it will acknowledge receipt of the file. This can take anywhere from ten days to a month.
- A negotiator is assigned. This can take anywhere from three to 30 days. (Note that it is possible to request a different negotiator if the buyer or the buyer’s agent feels unsatisfied with the process.)
- A BPO is ordered. This is where the homework of both the listing and buying agents pays off.
- The file is sent for review. This can take anywhere from two weeks to 30 days.
- The bank will issue a short sale approval letter.
Buyers interested in a short sale property should not feel intimidated by the process, but they should be prepared to take the necessary steps and wait for the sale to unfold. Have more questions? Don’t hesitate to get in touch. Taylor Kolon, Cole Metcalf, and Victoria Watson are happy to help you handle whatever situation arises as you find your new home.