Understanding How To Buy A Short Sale Property

Understanding how to buy a short sale property will make you a sharper home buyer because you’ll be armed with the knowledge necessary to make the smartest home buying decision for you and your family.

The US Housing Market has millions of homeowners upside down on their mortgages. In most of these cases, these homes were bought and sold during the height of the housing boom. Since, many homeowners have been left underwater, that is owing more than their homes are worth.

These homeowners can elect to “short sale” their property which means the mortgage lender or mortgage lenders if there is a first and second mortgage on the property, must agree to take a loss on the original amount lent, to allow the homeowner to transfer title to the new home buyer. This is in essence what a short sale is all about, “shorting” the amount of debt owed on the property.

How to buy a short sale Property

Lets take a look at example. A home is listed for sale for $250,000. Chase Bank has a first mortgage on the property for $315,000 and Wells Fargo has a $85,000 second mortgage in the form of a home-equity line of credit. So there is $400,000 total owing on the property. Recent comps of that property and in this around the neighborhoods indicate a present value of $250,000. This homeowner is upside down in the amount of $150,000. We simply subtract the amount of debt owed on the property by the approximate amount the property would sell for in the current market, that being $250,000.

Here are some must knows about how to buy short sales:

• Short sales take longer-remember the first mortgage and the second mortgage have to agree to take a loss. Maybe the first mortgage lender can get $.60 on the dollar and the second mortgage lender on the property maybe gets a couple thousand dollars, sometimes zero. So because the second mortgage lender takes a huge loss, they have no financial incentive, no motivation to allow the short sale to happen. The lender in first position almost always agrees to the short sale because they can actually recover some of their monetary losses. Sometimes short sales can take as long as nine months or be as short as three months.
• Homeowner must be delinquent-usually the homeowner has been advised to stop making their house payment so the banks are usually more prone to want to allow the short sales to take place. Make sure your to ask your real estate agent to find out from the listing agent about whether or not the homeowner is current on their house payments. The longer the homeowner is delinquent on their house payments, the more likely you are to be successful in closing escrow on that property.
• Negotiating credits for closing costs will be difficult-unlike a foreclosure, where the bank can write off the monetary losses, short sale lenders cannot. The first mortgage and second mortgage holders take a realized and immediate loss when approving a short sale. Because of the fact the lenders are already taking a loss, the likelihood of the buyer getting a credit for closing costs is quite slim. If you’re going be buying a short sale, best to have your down payment and closing costs all ready to go.
• Tight On Deadlines-short sale approvals are only good for XYZ days. The bank is doing the seller a favor by allowing them to sell the property for less than the amount owed. This can put a little motivation on the mortgage lender and the real estate agent to make sure that escrow closes fast and on time.

Buying a short sale property will take longer, but there is a silver lining that you as a home buyer have an advantage on, that advantage is less competition. Many home buyers are impatient. If you can be patient, there is tremendous opportunity sticking it out with a short sale transaction.

Short sales-much less competition-longer close of escrow-more opportunity. Understanding how to buy a short sale property is the key advantage in today’s real estate market.