JCPG is highly experienced in the short sale process. We continue to close dozens of short sale contracts each year for both buyers and sellers. We are very familiar with the process and understand what it takes to make the deal work.
What is a short sale?
The term “Short Sale” is used in the real estate business to describe a situation where there is more debt owing against a property than the property is worth. In other words, the owner can’t sell the property unless the creditors (“Third Parties”) agree to accept a payment that is less (or “short”) of the amounts actually owed to those Third Parties. The Third Parties are usually mortgage lenders, mortgage insurers, bankruptcy trustee, and federal, state and local taxing authorities (such as the IRS or State Tax Commission).
How does it work?
A Short Sale requires the written approval of the Third Parties. Consequently, the owner of the property, and any interested buyer, are advised that even if they reach an agreement between themselves for the purchase and sale of the property, that agreement will not be binding until the Third Parties approve the terms of the Short Sale.
How long does it take?
Approval from the third parties can be as short as a few weeks to as long as a few months. Currently, average is 90 days.
Why buy a short sale?
Many times, short sales are great opportunities to buy a property somewhat under market value. Sometimes, depending on when the building was constructed or if there were many investors that purchased in the building, it might be the only way to purchase your ideal property. Frequently, these properties are “handyman specials” before they are bank-owned.
What should I watch out for on short sales?
Before considering a short sale purchase, pick up the phone and call us. The JCPG team will research the listing and help you evaluate the opportunity first. Just because that home is listed as a short sale doesn’t mean it’s really for sale at the advertised price (because it’s subject to lender approval). This is where JCPG starts our research:
- Comparable sales – We pull comparable sales in the area to make sure the listing price makes sense.
- Check mortgage history – Ideally, one mortgage is all you want to have encumbering the property. The more liens there are against the property, the less of a chance that all parties will work together to forgive the sellers debts.
- Status of the listing – We check to see if the seller has submitted all of their necessary paperwork. If other offers have been submitted, we will find out if a BPO (Broker Price Opinion) and/or appraisal has been ordered and how far the file has moved into the process.
- Property condition – Because short sale properties are required to be sold as-is, a thorough analysis must be done as to the physical condition of the property.
So, everything checks out and you would like to make an offer.
How does the process work?
We will work with you to write an as-is offer stating that it is contingent upon third party/bank approval.
The seller may counter your offer. Remember, the contract is between you and the seller, not you and the seller’s lender. The seller does not want to submit an offer to the bank knowing it will likely be rejected and/or counter-offered because it is too low. But, this doesn’t happen too often.
After the contract is signed and agreed upon, it will be sent to the seller’s lender or lenders. if there is more than one mortgage holder. Documentation submitted with the contract includes an estimated net sheet, the buyer’s approval or proof of funds letter, the listing agreement, seller’s financial worksheet, recent paystub, recent bank statement, last year’s tax returns and hardship letter.
The seller’s lender will then order an independent appraisal and/or Broker Price Opinion (BPO).
The seller’s lender will accept the offer or counteroffer with the appraised value.
You will accept or counteroffer. Your offer may ultimately be rejected if it is not at least 83% of the appraised value. This varies by lender. Additionally, the lender(s) may ask the seller for a cash contribution or promissory note. If the seller cannot comply, you may be asked for additional monies to make up some of the difference. If the property is a good deal, you may wish to do so.
The time line for initial response from the lender may be eight to twelve weeks. This is because lenders have an overwhelming number of sellers asking for Short Sales. Some of the bank “negotiators” have as many as 500 files at one time. They often work on the files facing imminent foreclosure sale dates first. We stay in contact with these lenders frequently in order to get updates on the offer.
After final approval by the lender, a “demand” or “approval” letter is sent to the seller. The letter will normally stipulate that closing must occur by the date stated in the contract, or there will be a per diem penalty for not closing on time. Thus, you are expected to have your mortgage, insurance and inspections completed in a timely manner.
The lender will expect to see a copy of the settlement statement at least two days prior to closing to ensure it is accurate, and matches what was stated in the net sheet that was submitted with the offer and on the approval letter.
Congratulations! Your patience has been rewarded. You got a great deal!