For Buyers

Tips for a Short Sale Buyer

Buying in a short sale transaction can be a boom or bust (or something in between). In a short sale, the property is “upside down,” which means the seller owes more on the mortgage than the property’s value. The short sale seller and buyer enter into a sales contract, but the seller is not obligated to sell unless the seller’s lender accepts a loan payoff for less than what’s owed. Some buyers flock towards short sales in hopes of snatching up a good deal, whereas others stay away believing short sales are more trouble than they’re worth. Ultimately, as the buyer, you can’t be sure your short sale transaction will succeed, but you can certainly stack the odds in your favor. Here are some good tips to help ensure your short sale purchase will be a boom, rather than bust:

  • Hire a REALTOR®: One of the best things you can do in a short sale is to hire a qualified REALTOR® to guide you through the home buying process. A REALTOR® can help you find the right property and negotiate a good deal. Not all real estate agents are REALTORS®. The word REALTOR® is a trademark designation to distinguish real estate agents who are members of the NATIONAL ASSOCIATION OF REALTORS®. REALTORS® stand apart because, among other things, they voluntarily pledge to abide by the strict code of professional ethics of the NATIONAL ASSOCIATION OF REALTORS® to protect and remote their clients’ interests.
  • Knowledge is your friend: A short sale is a new experience for most home buyers, but knowledge is a key to success. You should know the pros and cons of buying a short sale. You should also understand the overall short sale process — what you need to do, how long the process may take, and what the common pitfalls may be. Your REALTOR® may be a great resource for information. Short sale information is also available online, such as news articles, governmental websites, lenders’ websites, and short sale blogs. Be careful, however, because a lot of misinformation on short sales also floats in our midst.
  • Do your homework: Gather and review as much information about a transaction as you can before writing an offer to purchase. Your REALTOR® can help you identify which properties for sale in the Multiple Listing Service are short sales. If so, you and your agent can obtain information from public records, comparable sales, and other sources to determine the likelihood your short sale will succeed. As an example, find out how much the seller owes. A transaction where the lender must forgive a $20,000 shortfall may be preferable to a transaction where the lender must approve a $200,000 shortfall. Also, find out what interests affect title to the property. A transaction where only one lender must approve the short sale is less problematic than a transaction where both senior and junior lenders as well as other creditors must approve the short sale. As another example, determine what price the market will bear. A transaction with a sales price at market value is more likely to be approved by the short sale lender than a sales price below market value.
  • Write a clean offer: That doesn’t refer to sanitation. The word “clean” is industry jargon for describing an offer to purchase that the seller is unlikely to take issue with. Although the lender must ultimately discount the payoff, you have no purchase contract unless the seller accepts your offer. To get the seller’s acceptance, you can offer a good price, demonstrate your ability to obtain financing, and offer other favorable terms for the seller. A clean offer can make a big difference, especially if you are competing with other buyers to buy the same property.
  • Understand the timing: The timing of a short sale transaction can be tricky. Things can start off slow, but speed up at the end. Once the seller accepts your offer to purchase, you may wait a few weeks to a few months for an approval from the seller’s lender. As the buyer, other than asking for status reports, it may be difficult for you to speed up the short sale approval process. Lenders are often inundated with short sale requests. Each short sale request may involve a sizable loan. Before agreeing to give up the collateral for its loan, the lender may take its time to review the seller’s financial position, the property value, and the terms of sale, among other things. Once the lender approves the short sale, the pace can change dramatically. Because a short sale approval usually expires within a few days or weeks, a buyer must move quickly to finalize the transaction. To make sure you succeed in your short sale transaction, be prepared to wait a long time for the lender’s approval, and then perform quickly thereafter. Patience and persistence will serve you well.
  • Prep as best as you can: Because of the unique timing, short sale buyers are often uncertain whether to perform on their sales contract before the short sale lender’s approval. On one hand, a buyer may be reluctant to incur expenses by ordering property inspections and appraisals until after the lender approves the short sale. On the other hand, if the property inspections and appraisals are unsatisfactory, the buyer waited all that time for naught. Also, if the processing of property inspections and the buyer’s financing causes delays, the short sale approval may expire. The alternative of waiving your inspections may be too risky. So what do you do when faced with this dilemma? You simply do the best you can, depending on your specific circumstances. For example, you may decide to pay for a credit report because it doesn’t cost a lot of money and your lender will use the same one if you end up buying something else. Or perhaps you can find a lender to approve your loan without charging any upfront fees. Or perhaps you decide to wait on ordering a professional inspection because the house is well-maintained and relatively new. In the meantime, you can conduct cost-effective investigations, such as reviewing the seller’s Real Estate Transfer Disclosure Statement and other disclosures, asking a contractor to give you a free estimate for certain repair items, or going over comparable sales in the neighborhood with your REALTOR®.
  • Manage your expectations about the property: In a short sale, the property may be in excellent condition, or oftentimes, the distressed homeowner may forego maintenance and repairs. As the buyer, you may ask the seller to make certain repairs or do other things before close of escrow. But there’s a good chance you’ll have to take care of those things yourself. A seller generally receives no money in a short sale. Given the seller’s financial situation, the seller may be unwilling or unable to take care of the repair items that you may request. Moreover, the seller’s lender, who has already discounted the payoff, may be unwilling to discount the payoff further to take care of the repair items that you request.
  • Don’t lose sight of the big picture: Buyers can get so wrapped up closing a short sale transaction that they lose sight of the big picture. Whether it’s a short sale or not, buying a home is a serious matter. Be sure you are ready for home ownership by determining the financial, tax, liability, and other legal consequences of your transaction and consult with an accountant, attorney or other professional as needed. With the proper planning, negotiations, and execution, buying your piece of the American dream can become a reality.

First-time Home Buyer

If you’re a first-time home buyer, you’ve probably discovered that you have a lot to learn, and unfortunately, it’s all too easy to get burned. But don’t be discouraged. By doing some research, you can avoid common first-time buyer mistakes.

Try to Refrain from Large Purchases

If possible, don’t make any big purchases or take out loans that you can’t pay off in full within six months. When you’re calculating how much you can afford to spend on a home, your total monthly debt should not exceed 36% of your gross monthly income. If you owe any more than that, you could find it hard to get a loan.

Investigate “Hidden” Costs

Closing costs are normally 3-5% of the property’s value. In addition, owning a home has associated costs – insurance, property taxes, and maintenance all add up. Plan to spend 1% of your property’s value on annual repairs. Remember that moving into your first home probably means spending extra money on furnishings, too. Take all of these things into account when you’re calculating how much you can afford to borrow, and how much you’ll need to cover up-front costs.

Shop Around for a Loan

In a hot market, sellers often only consider bids from buyers who have mortgage pre-approval. Don’t use this as a reason to rush into getting a mortgage. Take the time to find a good deal, and carefully consider your options when it comes to interest rates and other terms. Take into account how long you intend to live in the property. If you plan to move out after a few years, an adjustable rate mortgage may work better for you. Get a copy of the Good Faith Estimate before making a commitment so that you’re aware of these costs up front.

Using a Buyer Agent

A buyer agent is legally responsible for representing the buyer’s interest in a real estate transaction. Generally, the buyer agent is compensated by the seller at the time you purchase a new home. There are some limitations to using a buyer agent, however. Before you decide, have a Realtor explain the advantages and disadvantages of using a buyer agent.

Hire Independent Inspectors

When you find a property you like, the next step is hiring inspectors. This is usually optional, but it’s still an important part of the process. Before you make this purchase, you need know all about the property – whether it’s structurally sound, if the plumbing and wiring are in good condition, and if it has sustained any major pest damage. Your agent may provide you with a list of contacts or may offer to help handle it. However, it may be more prudent to hire independent inspectors. Using an agent’s “buddies” sounds attractive because it’s one less thing for you to do, but on the other hand the agent wants this deal to close so they can collect their commission, and they may not have your best interests in mind.

Don’t Let Your Emotions Take Over

Buying a house can be stressful. Try to keep a cool head and be realistic. If small repairs are needed on a property that you really like, don’t be discouraged if the seller refuses to take care of them. Instead, negotiate a lower sales price. Similarly, set a limit on what type of repairs you’re willing to tackle yourself and then stick with that limit. If you don’t want to cope with major structural repairs then avoid properties that need them, no matter how much you like it or how flexible the seller is willing to be on price.

Copyright© 2010 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). The information contained herein is believed to be accurate as of May 24, 2010. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney. Permission is granted to C.A.R. members only to reproduce this material for non-commercial purposes (personal use and to distribute to clients). C.A.R. members must reprint the material in its entirety, but may add their own names and contact information where specified.

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