With the changes in our Sacramento real estate market there has been an increase in foreclosures and I have been seeing advertisements and getting more questions about “short sales.”  A short sale is when the lender on the property will accept less than the full amount due on their loan when the property is sold.  Lenders will accept a lower dollar amount to avoid the expense and time of a foreclosure.  Generally a short sale occurs when the loans on a property are greater than what the property can be sold for.

Are short sales too good to be true?

Buying a “short sale” seems too good to be true and more than often is.  It is not as simple as it looks, you will not buy the house at half its value and very rarely will close as quickly as a normal home purchase.

The first thing potential buyers should be aware of is that even though a seller may accept an offer it does not mean the lender will. In addition, remember the seller will undoubtedly be in default because they have stopped making payments.  In today’s Sacramento real estate market it may be possible, or even likely, the seller owes more than the home is worth so even a discounted price from the lender may not be a bargain.

Use your Realtor and get some information.

Your Realtor can get you helpful information like who actually owns the property, if a foreclosure notice has been filed and how much is owed to which lenders.  This is important information that will help you structure an offer.

It is also important to know if there is more than one lender and which one you will be dealing with.  In almost all cases you will be negotiating with the lender who is in second position.  These are generally the lenders who have made a equity loans.  Their position essentially protects the lender in first position.  For a non-first place lender to foreclose they must buy out the loan of the primary lender.  In other words, second or third tier lenders do not want to foreclose and are willing to negotiate.

Clearly you want an agent who has knowledge of how a short sale works so they can advance the purchase and protect you.  

Dealing with the lender requires patience.

Just because the property is advertised as a short sale does not mean the lender is on board.  In my experience some of the “short sale” come-ons have had no conversation with the lender and may not qualify.  A lender is not going to accept a short sale unless the seller has no equity and has no means to pay the difference between the sales price and the existing loan.  There must be a well documented hardship letter from the seller to the lender stating these facts.  Always remember, in a short sale the seller may not receive any money because the lender is losing.

Again, your Realtor can help you determine if the lender has been contacted and is agreeable to accepting a short sale offer.  They can also help you find the right person to deal with in these large and often bureaucratic organizations and maybe as important determine the level of cooperation the seller has.  A successful short sale is dependent on the cooperation of the seller. 

Once the seller has accepted an offer the work begins.  There is not a deal until the lender approves.  Most lenders will want to see a high earnest money amount, will want the buyer to be pre-approved for a loan and some comparable sales that support the price being offered.  More often than not, these properties are run down and in need of significant repair to bring them to market.  This needs to be well documented if you expect to purchase the home for an amount less than the comps support.

One of the keys to successfully completing a short sale buy is to keep the pressure on the lender.  Remember who they are, the lender employee has no personal stake in the property and may have more work than time.  I suggest giving them a reasonable deadline to respond as determined by what you or your agent can determine about their approval process.  Some lenders delegate approval authority to individuals while others make decisions through a committee.  A good rule of thumb is two to three weeks before the offer expires.

What happens if the bank accepts your offer?

Clearly your Realtor will be interested to know that the commission amount listed in MLS it is subject to lender approval and since the lender is not getting all their money back, they more than likely will want to pass on some of the pain to the brokers involved and negotiate a lower commission to be split between the buyers and sellers agents.  If you have signed a buyer's broker agreement with your agent, most agents will not charge you the difference but remember to ask.

In a short sale it is unlikely the lender will pay for some of the normal items paid by sellers.  This includes a pest inspection and repairs for damage.  Buyers will be purchasing the home “as is.”  In addition the lender will not be paying for home protection plans and may not even follow the county conventions on what costs are paid by the buyer and seller.  To avoid any surprises, this should be covered in the purchase agreement.

Just because the lender is not paying for inspections and repairs does not mean they should not be done.  In this situation, where the seller has not been able to make his mortgage payment, there is a high probability they have not been able to perform normal maintenance.  For this reason it is vital that the buyer protect themselves by obtaining inspections and doing due diligence prior to releasing contingencies which should include inspections.

Is a short sale worth it?

The answer to, is a buying a short sale property right for you depends on your situation.  From a buyers perspective there have been some good deals done but they take time, require a level of cooperation not normally found between buyers and sellers, a good realtor willing to work hard and a responsive lender.  A significant issue with short sales is you are dealing with a seller and a lender and often when the transaction fails you are weeks and even months into it before you end up walking away or the lender takes a position you can’t live with.  If you are interested in pursuing short sale acquisitions, talk it over with your Realtor and find out if your objectives can be met. If you think it is a way to get a deal, I’d suggest there are much easier ways. 

As we are entering this “increased foreclosure” phase of the real estate market I believe, based on experience, lenders will not be as easy to deal with as they will if this continues for two or three years.

Check out Julie’s website, www.jalone.com for more articles, free home search, her daily blog, Keep it Real and Sacramento and her reality real estate series, MyForSaleSign.