Buyers often make an offer on a short sale in the Bay Area believing they will get a good deal, and the home is a great opportunity. Still, you may want to think twice before making on offer on a short sale home in pre-foreclosure. The process is much different than a traditional real estate sale and it is not as simple as you may believe.
In some areas, buyers wait up to 6 months to close on short sales, and there are potential downsides to this buying strategy.
What is a Short Sale?
In a short sale, the owner’s lender has agreed to accept a discounted payoff on the mortgage in exchange for releasing the existing mortgage. When you make an offer on a short sale in the Bay Area, it is not just the owner who must accept your offer; the lender must also accept it.
A seller does not need to be in default before a lender will consider allowing a short sale. For example, some lenders will allow a short sale if the seller is current on the mortgage but the home value has fallen dramatically. Because the seller may owe significantly more than the home is worth, a discounted price may just bring the price to market value, not lower.
Lenders are not likely to accept a short sale unless the seller cannot repay the difference between the sales price and the existing loan and has no equity in the property. Sellers must also provide their lender with a hardship letter, and they may owe taxes on the debt their lender forgives.
In most cases, the seller receives no money in a short sale. Be careful, as some sellers will resort to fraud and try to demand that you pay them money outside of the transaction to buy the home.
You may be a good candidate to buy a short sale if…
- You are very patient; after the seller accepts your offer, you must still wait for the lender (or lenders) to approve the sale. Expect this to take around 2 months if there is only one lender, or 4 months or longer if more than one lender is involved.
- You have financing in order: Lenders like to receive cash offers on short sales. Even if you cannot pay all cash, you must show you are well qualified with financing in order. This means you should be pre-approved with a large down payment and the ability to close at any time.
- You have no contingencies. If you must sell your home before you can close on the short-sale home in the Bay Area, or you need to be in the house by a certain date, you may want to think twice about buying a short sale.
Before you make an offer, find out who is in title, if a foreclosure notice has been filed and how much is owed on the home in the Bay Area. This information is very important because it will help you decide how much you should offer. You should also find out if the seller has declared bankruptcy. If so, be advised that most lenders will not go forward with a short sale, as negotiating on a short sale on the home is considered a collection activity, which is banned in bankruptcy.
If the home has two loans, you may be facing a major headache because the second lender may not want to go ahead with the short sale. If the seller owes $150,000 on the first mortgage and $30,000 on the second loan, offering $150,000 means the second lender will receive nothing from the sale. The first lender must give the second lender something to gain cooperation in the sale.
Get an Agent with Experience
If the listing agent has no experience with a short sale, you can already expect some difficulties. The best thing you can do is to make sure your own agent has experience with short sales and can anticipate problems and stop them ahead of time. An agent with experience in these cases will help the transaction close quickly and protect your interests. You do not want to miss important details or find the transaction will not close on time because there was no follow-up.
Purchasing the Home As-Is
You will be asked to buy the home in the Bay Area “as is,” so the seller and lender will not make any repairs to the home prior to sale. The lender will also not allow the seller to pay for items a seller traditionally pays for, such as home protection plans or termite inspections.
Because the lender is already taking a loss by agreeing to a short sale, it will be up to you to obtain a home inspection and make sure you accept the home’s condition.
After the seller accepts your offer on the home in the Bay Area, the listing agent forwards it to the lender for approval. There is no deal until the lender also accepts your offer. The lender will also want a copy of the earnest money deposit and proof of funds, and many lenders will ask you to raise your sales price.
At this point, the lender will also want to make sure you have financing available and you are pre-approved for a mortgage, so you must send the pre-approval letter to the lender. You should also make sure your agent sends the lender a list of comparable sales to support your offer.
Waiting for a Response
Your offer on the home should be contingent upon the lender’s acceptance, with a time frame in which the lender must respond, after which you may cancel the offer. Some lenders with a high volume of short sales will send the offer to a committee, but most will make a decision within 2-3 months. You cannot contact the lender during this time, so you will need a lot of patience.
The lender must approve the commission paid to the agent, regardless of the commission the home seller agreed to. While the seller will not keep any money from the transaction, they must still pay the commission from the proceeds of the home sale, and the lender will usually negotiate a commission with the listing agent, who then shares it with your agent.
If you have a signed agreement with your agent in the Bay Area, you can ask if the agent will waive any difference due, or you may have to pay it yourself out of pocket.