Are You Considering Buying a Home in a Short Sale?
A short sale is any sale that results in the proceeds of the sale being less than the homeowner's debts against the property. In most cases, a lender will only agree to a short sale when a borrower is seriously behind on their payments, and, when they agree to it, they've also pledged to forgive the homeowner's remaining debts on the property.
That's where you come in: if you can purchase the home during this delicate time, you may be able to buy it at tens (or hundreds) of thousands of dollars less than its appraised market price. But to do so, you might have to deal with a whole lot of red tape. At home.loans, we believe that the more you know about short sales, the easier the entire buying process will be -- and that's why we've created this easy-peasy guide to help you about.
How to Locate Short Sales
Locating short sales isn't quite the same as finding a home that's selling in a traditional fashion. While you can always ask real estate agents if they know of any short sales in your area (or whichever area you want to buy in), many short sales are also listed as FSBO (for sale by owner). Many FSBO websites exist, and there are also FSBO sections within many major online real estate portals. If you don't find any good deals there, short sales can also be found via word-of-mouth and traditional networking events, such as going to local real estate investing groups or joining a real estate Facebook group.
Why You Should Never Buy A Short Sale Without Professional Help
When we say professional help, we're not talking about your therapist (though you may need one if your short sale goes awry). Instead, we mean that if you're thinking about buying a home in a short sale, you should get assistance from an experienced real estate agent, real estate attorney, or both. The short sale process can be lengthy and extremely confusing, and if you're not getting the right advice, you could get burned. And, just like with buying a regular home, have a full title search conducted before you make any serious financial commitments to purchasing a home on short sale.
What you Need to Bring to a Short Sale
Since the short sale purchasing process is a lot more complex than the typical home purchasing process, you'll need to bring a lot more to the table, including:
A purchase and sale contract: If you want to do a short sale, the first person you'll need to get an agreement from is the owner of the home. A purchase and sale contract simply states that the owner of the home is willing to sell their home for a specific price, and that you're willing to buy it. You should decide on a price you're willing to pay (or lower), because the price is only likely to go up from this point.
A serious downpayment: If you're going to convince a lender to allow you to buy the house, you'll need to persuade them that they'll be better off dealing with you than the current owner, and that often requires significant cash.
A hardship letter: Unless a homeowner is seriously behind on their payments, a lender is unlikely to even consider a short sale. To convince them, the seller will usually have to write the lender a letter, explaining their financial hardship, and why the seller will not be able to pay off the loan either now or in the future. The seller should also send as much documentation as possible, including things like pay stubs, tax documents, divorce papers (if applicable), car repossession information, and other evidence of financial hardship.
A property value statement: In most cases, this can be an appraisal from a property appraiser, or a price estimate from a broker. The lower it is, the better for you. If you want to save the most money, include all the property's shortcomings and faults -- as well as anything else you can think of that would reduce the property's price and make it harder for the lender to sell for a reasonable price on the open market.
A settlement statement: A settlement statement will give the lender an overview of the purchase price, the closing costs, and other associated fees or costs involving the sale of the property. It can typically be prepared by a closing agent or a real estate attorney.
Financing for your part of the sale: If your credit is decent, the seller's lender may be willing to offer you a mortgage. But, if not, you may need to get one from another lender. You'll most likely need to be pre-approved though, since the sale could close in as little as 20 or 30 days after an initial offer -- which isn't quite long enough to go shopping for a mortgage.
Speak with a Mortgage Specialist
If you're serious about buying a home in a short sale (or buying a home otherwise), get in touch with an experienced mortgage professional. A professional can help guide you through the process and help you avoid potential pitfalls of the short selling process. Ask as many questions as possible and to inquire about all the potential costs you may face.
Remember, lenders are likely to be far more experienced than you at avoiding financial risks -- so you have to be vigilant to ensure that you aren't going to be the one to lose out in the deal. Whether it's a hidden problem with the home, an unexpected last-minute negotiation, or any other kind of funny business, short sales are known to be treacherous, so you'll want to be prepared for anything.
To learn more about short sales, home refinancing, or any other part of the home buying or home loan process, just fill out the form below and we'll get in touch!