Short Sale Properties

Buying short sales can be a way to find a great bargain on a personal residence, vacation or investment property.
For a property to be considered a “Short Sale” the lender(s) must accept a shortage of funds as full price for satisfaction of the mortgage.  In other words, the lender is getting shorted (taking a loss) in the transaction.

Sometimes a short sale is referred to as pre-foreclosure sale. Short sales often involve a property that is in the process of being foreclosed on, (litigation has started), or is headed into a default situation where foreclosure is an eventuality if the property is not sold beforehand. Many homeowners use a short sale to avoid foreclosure. However not all pre-foreclosure sales are short sales. If the home can be sold for the amount owed or more it is not a short sale.

Lenders will accept less than the amount owed on the property when the market value of the property is less than the debt owed. This devaluation could be due to market conditions or physical issues such as needing extensive repairs. Many homes have lost significant equity in the recent real estate market downturn making a large number of homeowners “‘upside down”, owing more than they can sell for.

The Bank's Problem

The bank has a major problem if the borrower cannot make the payments or sell the home for what’s owed, they have two choices: foreclosure or short sale. If they choose foreclosure, they spend time and legal fees, (average 9 months and $25,000.00) and take the chance that the property will be in sub-par condition because some people who are foreclosed on will not maintain their homes. Once they’ve foreclosed, the bank can only sell it for market value anyway and will incur additional holding and selling costs.

To avoid the foreclosure and associated costs the bank may accept a short sale if the amount offered is comparable to what they would receive if they pursue the foreclosure.

Reasonable Offers

Despite what you may have heard on late night TV infomercials the banks are not giving properties away. You can not buy short-sale properties 50 percent below market value and flip them for quick cash profits. If the bank gets the tiniest hint that you are trying to flip, assign or option your purchase contract they will revoke their approval. Remember, they are taking a loss and they are not going to leave significant profit (equity) on the table for a third party.

Once the short sale process is started, the bank will order an appraisal or a BPO (Broker’s Price Opinion). This establishes the fair market value of the property. This is the value that the bank will negotiate from because this is what they believe they can sell the property for in the current market if they foreclose. The bank will consider the legal costs and carrying and sales costs they will incur if they foreclose, and any needed repairs. Offers that are in the 85% to 95% range of market value stand a good chance of being considered and accepted.

The Short Sale Process

The short sale process is anything but short. It can take from 4 to 12 weeks to negotiate and process a short sale and another 30 to 45 days to close once the sale is approved.

The lenders have stringent guidelines, documentation requirements and reviews by several levels of management before a short sale can be approved.

Communication from the lender is infrequent during the process and often leaves the buyer and seller wondering if anything is happening.

The Advantages

Short sales do have one or two advantages over some types of foreclosures. They’re completely free and clear of any liens, or they won’t close. Every lien holder on the property must agree to the short sale and release their liens. When you purchase a foreclosure property on the courthouse steps, if you don’t do your due diligence, you could actually purchase a property that does have liens that you will have to deal with.

With a surplus of homes and relatively few buyers, banks are becoming more receptive to accepting discounted prices. They’re generally accepting between 85 to 95 percent of market value for homes in good condition and 70 to 80 percent or less for homes needed significant repairs.

If you’re patient you can buy a nice property at foreclosure sale prices.

Hire An Agent With Short Sale Experience

Always work with a Buyer’s Agent or Investor’s Agent with Short Sale Experience! The lender will pay his fee so there is no excuse not to use his or her services. Its one strike against you if the listing agent has never handled a short sale, but it's even worse if your own agent has no experience. You need an experienced short sale agent if you’re serious about purchasing pre-foreclosure properties.

It's even more improtant if this will be your first short sale transaction, that you use the services of a real estate agent who knows the process. An agent with experience in short sales will help expedite your transaction and protect your interests. You don't want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.

Conclusion

Short sales are quickly becoming the next wave of bargain opportunities as lenders increase their efforts to avoid foreclosure and the economy forces and more homeowners to sell. Foreclosure inventories are decreasing and lenders are beginning to streamline the short sale approval process. 

A good buyer’s agent familiar with the process can help you select and purchase a short sale property at a bargain price.

Example

We recently finalized a deal on a luxury condo that originally sold for 1.1million dollars new in 2006. Due to the declining market the current real value of this and similar homes is $380,000. We we’re able to successfully negotiate with the first and second mortgage holders to get a short sale offer of $350,000 accepted, 92% of market value. Of course we started with a slightly lower offer expecting a little back and forth but the bank just would not go below $350,000. That was their “critical value”. Anything below that and they would be better off going through with the foreclosure and subsequent broker resale.

About the Authors: Michael Childs and Melissa Terrill are real estate investment partners and a licensed real estate agent team with Watermark Real Estate Group in Myrtle Beach South Carolina. Mike and Lisa use their experience as investors to help their clients find and negotiate the best possible deals. Email them at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit their website www.forsaleoptions.com. Watermark Real estate Group is the leader in investment, residential, and resort real estate in Myrtle Beach and the Grand Strand www.watermarkagents.com.