5 Frequently Asked Short Sale Questions Every Investor Must Know
By Paul Esajian on March 22, 2017
The real estate investing business is constant changing. Think about where you were in your business just one year ago. If you are like most investors you probably transformed your business in many ways during that time. It wasn’t too long ago when short sales and foreclosures ruled the real estate landscape. While these deals have declined steadily over the past five years they are still available in the right market. Working on a short sale is much different than working with a bank owned property. If you don’t follow a strict set of guidelines and procedures you can end up wasting months and still not get the deal. Short sale deals are still out there but you need to be able to act quickly, answer questions and supply the lender with everything they require. Here are five frequently asked short sale questions.
- “How exactly does the short sale process work?” A simple definition of a short sale is a real estate transaction where the lender agrees to accept less than the amount owned on the property. They do this because the homeowner is in default with foreclosure imminent and the lender does not want to go through this process. For the homeowner a short sale is one step before foreclosure. A short sale is a negative mark on the credit but not nearly as bad as a foreclosure. As motivated as the homeowner may be they still need the approval of the lender to complete the transaction. As we will see there are a handful of steps, and mountains of paperwork, required by the lender before they will make a decision. Everything with a short sale is based on the amount of equity, or lack thereof, by the homeowner. If there is equity you do not have a short sale and need lender approval.
- “What is required from the homeowner?” The lender will not simply accept any short sale offer on the property. They need to have justification that the homeowner cannot make the payment or has funds available for the closing. To make this decision there are several items needed from the homeowner. These items can change based on the specific lender but most will ask for two years of tax returns, two most recent paystubs, two months of bank statements and a comprehensive financial breakdown. This can be overwhelming for a homeowner who is essentially about to lose their home but without these the process will not move forward. As you discuss the process with the homeowner you should prep them for the fact that a lot will be asked of them. There will be times when certain items are needed on a time sensitive basis. If the homeowner is not all-in on working with you the deal can end up taking a lot longer than it needs to.
- “What damage is done to the homeowner?” As we mentioned completing a short sale does not mean the homeowner is off the hook completely. A foreclosure will stay on a borrower’s credit report for years and impact their ability to get a loan in the short term for at least 24 months. There has been a growing number of loan program aimed at helping borrowers who went through short sale and foreclosure but these require a higher credit score, down payment and increased interest rates. The difference between a foreclosure and a short sale is severe. The biggest impact with a short sale is with the homeowner’s monthly mortgage latest. Most lenders will not entertain a short sale unless the homeowner is late on their mortgage. There are a few exceptions but they are much more the exception rather than the rule. In most cases the homeowner needs to be more than 90 days late, and usually even 120 days. These lates show up on the credit report and stay there for at least one year.
- “What are the potential holdups with a short sale?” It is widely known that there are a handful of drawbacks with short sale deals. Even though lenders have expedited the process you are still looking at a minimum of six weeks from start to finish with the norm closer to two months. Even if you don’t mind the delays you can do everything right and still not get your offer approved. With the market stabilizing lenders do not have the need to sell at a severe discount. You can still find good deals but not to the same level as you saw last decade. Assuming the lender accepts the paperwork from the homeowner the next step is to order an appraisal on the property. The number they receive will determine whether they will accept, counter or outright deny your offer. You can submit any deficiencies with the property you like but if the lender doesn’t see it your way they do not have to move forward with the deal.
- “Will they accept lender financing?” The goal of a short sale from a lenders perspective is to sell the property as quickly as possible and with the least number of hurdles. They do not want to deal with the headaches involved with lender financing. While they have been known to accept deals with mortgage contingencies they are few and far between. Your best bet is to submit an offer with cash. The security of a cash offer coupled with a quick closing gives you the best chance of acceptance.
You never know when you will stumble upon a short sale deal. When you do you need to know what to expect.