Short Sales can be a bargain for Buyers. By learning the system, you can enhance your chances of purchasing a home for as little as 82% of current market value!
Short Sales are not a “slam dunk”. Every bank has different processing systems and timetables. Buyers will likely wait a long time to get a response from the bank. Understanding the short sale process can greatly reduce the buyer’s stress. There are methods to better your odds of success and reduce the processing time.
Our best advice is to have your affairs in order before offering on a short sale. Make sure you have current pre-approved financing specifically for a short sale property. Have your lender standing by to write a pre-approval letter for the exact amount of your offer. Get an experienced short sale Real Estate Broker to represent you. This agent can search for all short sales that meet your requirements and show the properties to you. The good news is that Colorado contracts and addendums for short sale transactions are heavily slanted to the Buyer’s best interest. As long as the agent stays current with dates and deadlines, there is no reason a buyer should have difficulties. The buyer has the right to inspect the property, have the property appraised at value, inspect title, determine property boundaries and get final loan approval after the lender approves the short sale. There are numerous avenues throughout the transaction that the buyer can terminate and have their earnest money returned to them.
The listing agent is actually the key to a successful short sale transaction. Negotiating with the bank is a full time job. Marketing and selling homes is also a full time job. Don’t believe a real estate agent that “can do it all”. It is just not possible to make a living selling real estate and also spend the countless hours negotiating and communicating with the bank. The listing agent with a professional negotiator is the best way to go. The negotiator works directly with the bank, while the Realtor sells homes. Once the home is under contract, the negotiator, Realtor and title company work together to complete the short sale.
Once the buyer locates a property of interest, the Buyer’s agent can determine the exact sales status of the property. It is not uncommon for a short sale to have multiple offers the first day on market. It can be frustrating to prepare an offer, submit the offer and then be notified the property is already under contract or even SOLD! A good Buyer’s agent will contact the listing agent directly to find the current status before writing an offer and prepare the listing agent for the offer. This establishes communication.
With the offer submitted, the wait begins! The short sale process can take 60-90 days or it could take 6-9 months! The listing broker’s short sale policy is critical to your success as a buyer. If the broker “stacks” offers (waits and collects several offers before submitting to bank) you will likely wait 6-9 months. The best policy is a listing broker that accepts one offer acceptable to the seller at a time, subsequently submitting the offer to the bank. This compels the bank to act immediately on the offer presented by the buyer. It is also critical that all of the bank’s short sale documents have been completed and submitted by the seller before submitting any offers. The documents can also be submitted as one package but it is generally better that the bank has started the process prior to the offer submission.
While the bank is reviewing the original offer, the listing agent continues to show the property for backup offers. In the event the first buyer does not come to terms with the bank, the backup offers are then given the bank offer to accept or reject in the order which the backup offers were received.
It is important when making an offer to determine the market value. The bank is hoping to get market value. If you make “low ball offers” you will likely not be successful. Many buyer agents are not willing to write offer after offer if the offers have no chance of acceptance. The best way to compete in the short sale market is to find quality properties that meet your needs and make an offer at or close to market value. Your buyer’s agent can help you determine value before making the offer.
Once you have a good buyer agent, property selected, a pre-approved loan and you have screened the listing broker’s policy, you are ready to make an offer.
The typical short sale process goes like this;
- Bank acknowledges receipt of the file. (10-30 days)
- A negotiator is assigned. (30-60 days)
- A Broker Price Opinion (BPO) is ordered. This is an opinion of value from a non-interested 3rd party Realtor. The bank will probably refuse to share the results.
- A second negotiator may be assigned. (30 days)
- The file is sent for review or to the PSA. (14-30 days)
- The bank may request that all parties sign an “Arms Length Affidavit” which stipulates that all parties are unrelated in business or personally with the transaction.
- The bank issues a short sale approval letter or offers alternate terms to the buyer.
- If the bank does not approve the buyers offer, the buyer may cancel or modify terms.
As you can see, patience and plenty of time are
needed for a successful short sale.
FHA Short Sales
FHA short sales are the easiest to process. FHA short sales are easy because there is a systematized process defined by HUD (Department of Housing and Urban Development) that absolutely has to be followed when doing the short sale. The lenders don’t have free reign to do anything outside of what is already defined by HUD. Here are a few things you need to know that give you an edge regarding FHA short sales.
The seller MUST be approved into a pre-foreclosure program before the lender can consider any offers. This approval is evidenced when the Seller receives HUD form 90045 from the loss mitigation department at the lending institution. This form is titled “Acceptance into the Pre-Foreclosure Sale Program.” This form will reveal the property’s appraised value! This is important to the buyer because until the seller has completed the requirements you will just wait…and wait! Before making an offer, it is wise to find out if the seller has complied with all the necessary requirements of the bank.
Here’s the secret! The minimum Net Proceeds (not purchase price) to satisfy the FHA 1st mortgage is based on an “As-Is” Appraised Value and Length of Time from the Date of Approval:
Less than 30 days = 88% 30-60 days = 86%
61+ days = 84%.
The net proceeds that the bank needs at closing MUST be no less than the percentages listed above of the appraised value, which is referenced on HUD form 90045. Every cost in the transaction that will be paid (i.e. Realtor commissions, closing costs, liens, judgments, seller incentives, prorated taxed, etc.) must be accounted for before reaching the 84-88% threshold. The bank will not take a penny less!
Once accepted into the pre-foreclosure sale program, HUD gives the seller 90 days to sell their home under the terms of the agreement. The lender is required to postpone all foreclosure proceedings 90 days past the date of approval in the meantime.
This is a roadmap for the buyer. You know what the bank is thinking and you can set a strategy accordingly. We won’t tell you all our secrets. The longer the home has been on the market, the bank will take less. However, you may not be able to wait on quality properties. We have seen short sale listings under contract in less than 24 hours.
FHA also provides an incentive of $1000 if they can get under contract within 90 days. This reduces to $750 if the home is under contract within 90 days and closes after the 90 day period.
FHA will allow up to $2500 as a payoff to a 2nd mortgage or other junior liens affecting the property. However, the seller will then be required to forfeit the $1000 incentive to the 2nd lender/junior liens. The incentive is applied first before applying the additional $1,500.
There are some closing costs that the lender will not pay on behalf of the seller at closing. The will not pay for a home warranty, HOA delinquent dues, HOA transfer fees or the water/sewer escrow. If the seller looks to you, the buyer, to pay these fees, FHA will allow the seller’s incentive to be used to pay these fees.
HUD absolutely will not allow the seller to pay any closing costs on behalf of the buyer if the buyer is receiving conventional financing. If the Buyer is obtaining FHA financing, then FHA will allow a maximum of 1% of the buyer closing costs to be paid by the seller. The buyer cannot “bid up” the purchase price to cover seller concessions on an FHA short sale. HUD will not allow it. The seller’s incentive can be used for seller concessions. If you need seller concessions over $1,000 you will not be able to purchase your home via the short sale.
As you can see, an FHA short sale requires a different strategy than working with a VA or conventional short sale. Most Realtors do not even know about this FHA incentives and the way they work. We at the Home Source Group constantly strive to keep up to date on all the changes in how each bank and investor works so we can help every buyers to purchase affordable housing.