How to purchase a short sale home
By Brad Merritt
Buyers pursue short sales to get a good deal on a house or investment property. However a short sale home is a home that is undergoing the pre-foreclosure process and has a lot of red tape associated with its purchase. No matter how good the deal may seem on a short sale, you really have to do a lot of research before making an offer. A short sale home can yield you great house at a great price and also help the seller out of trouble, but be sure to pay close attentions to the steps of this article if you are thinking about purchasing a short sale.
The most important piece of advice I can give you right off the bat is to hire a real estate agent that has short sale experience. I used to be a real estate investor, and I thought I knew a lot about purchasing property - but a realtor who has done short sales time and time again, knows the in's and out's - trust me - eat a little of your pride and profit margin and hire a realtor who knows how to do short sales. They know how the details involved with the sale, they know how to guide you through the process, they will be interested in protecting you, and they will be able to cut through the red tape quickly.
Now that you have hired a real estate agent that knows how to short sales, you can work with them on these next steps. They already know to do this, but it is good that you also know. You will have to go to the city office and ask for the public record information on the short sale house that you are interested in. Your agent can find out who is on the property title, the status of the foreclosure, notices that have been filed against the seller, and they can even find out how much is owed to the lenders. If there are more than one lender' s on the property - for example in the case of a 40/20 loan - then the purchase of the home will be even more difficult because both lenders have to agree to the short sale and buyout plan. It is also important to check the insurance required on the property and to try to figure out the utility costs including city utility costs and maintenance. Work with your agent to get these details.
Understand that the seller may still have external debts related to the property that need to get taken care of before the banks will agree to sell the property. Sellers may also owe taxes, city fines and fines, and utility fees that need to be taken care of before the debt can be forgiven, or this may get rolled into your purchase of the property based on negotiations. This can all delay the sale of the property. Additionally, the seller also a time frame in which to re-claim the property, and believe it or not, some people are able to come up with the money and save their property.
It is important to make sure that all of the proper documentation has been submitted by the seller and by you and your agent in the negotiations to purchase a short sale property. The seller needs to submit a hardship letter to the banks and start the discussions with them about a short sale. Once that process has been started, and you are interested in the property, you will need to make an offer to the seller. If you offer is accepted, you then need to send it to the property lender for final approval. You may also have to send along an earnest deposit for the property as well to the lender or to the sellers agent. You will also have to secure your own loan for the accepted price of the property and be able to show all of that documentation to the sellers bank as proof of your ability to purchase the property. Send a pre approval letter to the lender and to the sellers agent. Your agent should also send along a comp listing of homes sales in the are that are comparable to the price you are offering to pay for the home.
Always provide a solid date for the sellers lender to get back to you with the approval of the deal. You do not want to waste your time waiting on the approval of the sale only to find out at the last minute that it will not go through. Be sure to have your agent give the lender a time frame in which to respond. If they do not respond by that time, be sure to make it clear that you will be free to cancel your offer and get back your earnest deposit. Some lenders take two to three weeks to approve the final sale. Make sure that your real estate agent has the proper name and number of the lender contact that will be making the final decision.
Expect to pay a commission out of your own pocket. In a short sale, the bank is the one paying the sellers commission, and they will try to negotiate a final commission price to avoid paying out any more than they have to. Before you sign an agreement with your agent, ask them if they will waive the difference due. Most of the time they will not, and you will have to pay this out of your own pocket.
You will also be asked to purchase the property "as is" by the bank. It is in your best interest to get the property inspected and make your final offer contingent upon the approval of the inspections. This will cost a little more money up-front, but it will save you a lot of grief down the road. Just because there are people living in the home now, does not mean that it will pass current city inspections. Many cities require that the property get inspected before a new occupant moves in, and you will be hit with fines, penalties, and other hardships if you fail to take care of this up-front. I had this issue with a property once and the list of items I had to fix on the property were so long and so expensive that I should have never purchased the property. Get a home inspection and pay for other types of inspections such as pest, roof, sewers, septic tanks, and fireplace inspections. Also follow up with the city to see when the last inspections were conducted and ask the city what the expect should happen with the property.
If you follow all of these steps closely and work with an experienced short sale agent, you should be able to avoid a lot of the pitfalls and issues associated with a short sale home. When conducted properly, a short sale home can actually help you to save money in the long run and once you go through a short sale, you will have excellent experience for taking on your next property purchase.
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Joe Jurek CPA