5 Tips To Help Close More Short Sale Transactions
By Paul Esajian on July 12, 2017
The short sale is not dead. Even though the total number of short sales and foreclosures have declined in recent years they are still out there. Unlike in the past when all you needed was a proof of funds and a contract there are several additional steps needed to close today. While the process may be more difficult there is a pronounced reduction in competition. Many short sale investors have moved on to various other niches. The home run deals may not be there but there are still some below market values to be had.
The most important thing with any short sale transaction is to not waste your time with a property or a homeowner that isn’t ready to move forward. There are a few key pieces of information needed and questions you should ask to save yourself some time. Here are five important tips to help sift through the bad deals and close more short sale transactions.
- Discuss Process With Homeowner. The first step is making sure the homeowner is aware of exactly what is going on. You need to walk them through the process so they know what they can expect and when they can expect it. It doesn’t do you any good getting a signed contract if in six weeks they end up backing out. The main reason to do a short sale is to avoid foreclosure. If the homeowner isn’t late they will have a difficult time proving hardship and getting necessary lender approval. You have to let them know of the tax repercussions or damage to the credit report that a show sale may cause. It is important that after you explain the process you recommend they talk to an attorney, accountant or even their lender for clarification. It may take a few weeks to receive a commitment but it is better to explain the process and wait than get burned closer to closing.
- Get Lender Approval. It is not enough for a homeowner to want to sell their home. If the value is less than the amount owed the lender needs to approve the transaction. To get approval the homeowner needs to supply the lender with a handful of items including tax returns, pay stubs, bank statements and a full expense report. The items needed will be supplied by the lender after reaching out to them to discuss options. One of the reasons investors started looking elsewhere is because of the lengthy approval process. This number has been reduced but in the right situation can still take anywhere from 30-120 days (or more). Nothing can happen without lender approval. You and the seller can agree on a deal but if the lender doesn’t approve the homeowner for a short sale nothing will happen. It is important that everything requested by the lender is sent at once. You may need to walk them through the items needed but ultimately it will be worth it.
- Credit Report And Tax Liability. The two most common questions asked by homeowners deal with damage to their credit report and potential tax liability. Prior to making an offer you need to find out as much information in these two areas as possible. The reality with a short sale is that is doesn’t matter if your offer is one thousand or forty thousand under the amount owed. The only issue is how much potential liability to the seller. In some cases, the deficiency can be forgiven if the homeowner can prove they are insolvent. Again, this is something you should direct to their accountant and possibly their attorney. Once they are comfortable with the credit and tax issues you can discuss numbers. The homeowner has no leverage since they will not be receiving any funds at the closing. You need to make sure they are aware of this. In some cases, the lender may pay a homeowner or renter to leave but this is solely at their discretion.
- Support Your Offer. The idea of a short sale is to get the property at a discount. Lenders are no longer desperate to get bad debts off their books and sell for pennies on the dollar. That doesn’t mean they aren’t willing to sell at a discount in the right situation. You need to present a negative picture of the property and the market without going too far overboard. With your offer include an itemized list of cost of repairs as well as any comps that support your value. Whatever you offer the lender is going to order an appraisal anyway. If the appraiser looks at the same comps as you and notes the work needed you may be able to get your price. If they look at the high end of the market and come back with an unrealistic value you can make one more counter offer than walk away. You can revisit the property in 45 days but don’t waste your time trying to get the lender to move 30% off their appraised number.
- Follow Up. It is important to keep a database of every property you make an offer on. In today’s market, it is rare that your initial offer will get accepted. You may have to counter back and forth a few times before you get the number you want. There are other times when your offer is flat out rejected without a counter. Keep tabs of these properties and revisit them every 30 days. The closer the property gets to foreclosure, or in foreclosure, the more motivated the lender is. By staying on top of a property for six months or more you can get the inside track on a great deal.
Short sale deals are still being closed every day. You may have to be more selective in the deals you pursue but they are out there.