Talk to anyone who has dabbled in the real estate recent years and they will almost certainly have an opinion on short sales. Though not as common anymore, homeowners short selling their homes present an opportunity to get your foot in the door. Here’s what to know as a home buyer…
What They Are
A short sale is a transaction where a homeowner is selling their home for less than that they owe on the property. The bank with the loan against the property must agree to be shorted their original dollars lent to the homeowner. Not always, but in most instances, short sales can also be identified as pre-foreclosures. A pre-foreclosure is a situation in which the homeowner who has stopped making their mortgage payment, with the preceding foreclosure process following suit.
Banks can be reluctant to grant short sales unless there is some form of financial hardship causing an inability to afford the mortgage payment. Short sales used to take upwards of six to eight months for a bank approval. If there was more than one lender on the home such as a first mortgage and a second mortgage, the process would take longer. That time frame has changed. It is now reasonable to expect a short sale to take about three months from the time a purchase contract is presented to the bank for approval. Unlike a foreclosure where you’re dealing strictly with a bank, on a short sale, you’re dealing with the bank and the owner of the property so while the bank holds all the cards, you still have the human element as well.
Bank Approval
The bank usually will approve a short sale transaction if the cost of letting the home go to foreclosure is greater than the short sale loss. This is critically important because no bank in their right mind would approve a short sale if there is equity in the transaction as they can take the house back. In fact the bank would stand to profit doing so.
The bank has to agree to lose money by allowing the short sale to place, because of this, time can be the short sale culprit. On the house hunt? Fortune favors the patient buyers and here is why: many home buyers do not have the stomach to handle a potentially long drawn out process to purchase a home under short sale terms, let alone the hoops they may have to jump through when the bank signs off on the approval.
Why A Deal For Home Buyers
Less Competition coupled with a haircut price makes short sale properties worth your while. Done correctly, it is possible to buy a short sale house for a below market price, at minimum, a reasonable price given the location and home specs.
When the bank receives a short sale request from a homeowner, the bank does what’s called a BPO (Brokers Price Opinion) which is simply an opinion of what the house is worth from a local real estate broker. The bank uses this brokers price opinion when setting the short sale amount. The BPO always has variances in terms of the valuation, similar to a home appraisal, it is merely an opinion of value. A short sale house with less competition may entertain an slightly low ball offer usually within 10% of the list price. This will be determined by the location, neighborhood and home details; bedrooms, bathrooms, square footage and lot size. The makings of a good short sale opportunity could be identifying house needing some slight TLC (affects broker’s price opinion) in a desireable location.
Where To Find Them
The best way hands down other than word-of-mouth, is to use a good real estate agent. A true expert will have deep embedded connections in the community within the area you are looking to purchase in, a resource in finding these transaction types. Real estate agents also connect with other real estate agents both in their office and at broker tours, prompting news of upcoming possible pocket listings. Pocket listings are houses that never actually hit the market i.e. zero competition.
Financing A Home With Previous Short Sale In Your Past
If you have previously short sold a home in the last seven years, and you’re looking for a conventional mortgage loan, you’ll need 20% down (or equity) and four years since the short sale transfer date. Don’t have 20% down and still have a short sale in your past? It’s a three-year wait time from the short sale transfer date with only a 3.5% down payment (or equity) requirement for an FHA Loan. Fannie Mae & Freddie Mac are still gun shy lending to short sale borrowers. If a previous short sale is affecting your ability buy a home, focus on improving your credit, increasing your down payment and paying off debt-all of which will significantly bolster your qualifying ability when the clock is up.
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