Many factors influence whether buying a short sale will be a great deal for the buyer, including if the lender allows the property to sell for lower than the market value. However, if the property takes a long time to acquire or the offer falls through, then buyers can end up losing time and money. In addition to having a thorough understanding of the short sale buying process, achieving great results requires the buyer to have patience and luck. With help from this guide and by working with an experienced real estate professional, buyers can gain the knowledge required in order to successfully complete a short sale purchase.
Considerations Before Buying a Short Sale
Although many homeowners seek short sales after falling behind on their mortgage payments, this is not always the case. For example, a homeowner may also pursue this option when the market falls, leaving them underwater on their mortgage. Additionally, if the homeowner needs to move before the market recovers, selling the property at a loss may be their only option.
Homeowners seeking to avoid foreclosure may accept any low offer the lender will approve to avoid falling further behind on payments. Homeowners with an underwater mortgage, on the other hand, may push the price as close to market value as possible to minimize the difference between what they owe and the final sales price. This method is common in states that allow lenders to seek deficiency judgements, which order the homeowner to pay back the difference.
After determining the homeowner’s motivations, it is important for the buyer to proceed with the following steps to achieve a successful short sale purchase.
Hire an Experienced Agent
When buying a short sale, it is beneficial for the buyer to work with an experienced real estate agent, as these professionals know how to complete the process for the best possible outcome. A real estate agent can provide invaluable advice and help their client navigate each step to understand the timeline the sale will follow. Additionally, a real estate agent will use their knowledge of the local real estate market to help the buyer find and secure the best deal possible and assist through closing to ensure the sale is completed without missing any key deadlines along the way.
Buyers can find reputable agents by asking friends, family, and coworkers for referrals in addition to searching online for agents who advertise their experience in navigating short sales in the buyer’s area. No matter how they come across the agent’s name, buyers should confirm the agent has a current license and search for any red flags through the agent’s website.
Check Public Records
With their real estate agent’s help, buyers can find many short sale properties on the market. In order to see if the properties are a great deal and to place an offer, the buyer and agent will need to perform in-depth research using public records, where they can view:
- Total amount owed on the mortgage loan
- How long the current homeowners have owned the home
- Number of times the property has been placed on the market
- Any improvements performed without the appropriate permits
- If the property is currently in foreclosure
- If the home has more than one loan
Buyers will have to weigh the risks and the opportunity cost to determine if they are willing to take a chance on a property with multiple loans, which will involve a longer wait period, as more parties will need to approve the offer and come to a mutual decision.
Verify the Property and Homeowner Qualify for a Short Sale
Before placing an offer on a property, the buyer will need to verify the homeowner qualifies for a short sale. In order to qualify, the homeowner must either be behind on their loan payments or be underwater on their mortgage. Because lenders lose more money on a foreclosure, many lenders will consider selling a home as a short sale after a few months of non-payment. However, they may offer alternatives to help the current homeowner catch up on payments.
In addition to the property value dropping below the market rate or the homeowner being behind on their mortgage payments, lenders will consider a short sale if the homeowner has a hardship for selling, including:
- Job loss or transfer
- Wage reduction
- Serious illness
A buyer’s real estate agent can provide the verification that buyers need before moving forward with the short sale process.
Submit Documentation and Purchase Offer
When a buyer places an offer on a short sale, the homeowner and their real estate agent must submit a short sale package to the lender, which includes:
- Hardship letter
- Proof of financial difficulties
- Purchase contract
- Listing agreement
In addition to the above requirements, many lenders will request a closing disclosure, which will include the property details and estimated closing date. The lender will need to verify proof of funds or financing from the buyer to verify the buyer is able to complete the purchase upon offer approval.
Buyers can improve their chances of having their offer approved by offering a strong earnest money deposit in a trust account, a payment that shows the buyer’s interest and desire not to back out of the sale during the approval process.
Buyers should be prepared to purchase the short sale property as-is with the intention to complete any necessary repairs on their own after closing. However, an inspection is still recommended to understand the overall condition of the property.
Because the short sale process requires a long waiting period, buyers must remain patient — from the homeowner preparing and submitting the short sale package to the lender and other lien holders reviewing the offer and the supporting documentation. Although a loss mitigation specialist can help during the process, lenders often have additional individuals contribute to the decision before the lender issues a final approval or rejection.
Overall, the offer review process can take up to three months, depending on how many people are involved. Therefore, buyers need to accept the fact that they may miss other opportunities or risk losing their earnest money deposit. Depending on the market in that time period, the opportunity cost may be high, especially if the lender rejects the offer.
Reserve the Right to Conduct an Inspection
Even though the short sale property will be sold as-is, it is still beneficial to have an inspection performed to reveal any major issues with the property, which helps buyers understand what awaits once the offer is accepted. Deciding when to complete the inspection, however, requires the buyer to work with the homeowner to determine the ideal timing in completing this important step, either before the offer is submitted to the lender or after acquiring approval. By having the inspection completed ahead of time, buyers can avoid missing the chance to explore other purchase opportunities. If buyers decide to wait, they do not lose money on an inspection if the offer is rejected by the lender.
Either way, if the buyer is placing a generous earnest money deposit on the property, they will need to make sure the inspection occurs by the given deadline. Furthermore, buyers can work with their real estate agent to determine a timeline.
The Short Sale Contract
Buyers must work with their real estate agent to understand every facet of the short sale contract. This contract allows the homeowner to cancel the sale for a number of reasons, including a change in the homeowner’s hardship situation, the property moving into foreclosure, or if the homeowner plans to file bankruptcy to resolve their debts instead.
With the help of their real state agent, buyers can add to the purchase contract using a short sale addendum, where they can include:
- How long the buyer is willing to wait for offer approval
- The ability to complete an inspection and by what date
- Ways the homeowner and buyer will split the closing costs
- Contingencies in which the buyer can cancel the contract altogether
After receiving this document from the buyer, the homeowner will place it in the short sale package for the lender’s review.
Pros and Cons of Buying a Short Sale
Compared to foreclosed properties, short sale properties are often in better condition, as they do not sit empty for an extended period. Although short sales can provide an excellent opportunity, buyers must be prepared to take the time to search for short sales that offer the qualities they want in a home while aligning with their budget. Additionally, the buyer must prepare for severe delays, potentially waiting on lender approval for up to three months.
With short sales, negotiations are rare, as the homeowner is unaware of what price the lender will approve. These negotations include repairs or a reduced price if the home inspection reveals any serious issues. Therefore, buyers will need to be prepared to purchase the property as-is and assume the risks that follow.
How to Buy a Short Sale in Minnesota
If buyers are prepared to take a chance on buying a short sale, they can potentially profit in the end. Understanding how a short sale is completed in Minnesota will help buyers in the state reach their goal and achieve the best results possible. The steps required for purchasing a short sale in Minnesota include:
- Partner with an experienced real estate agent
- Secure funding or get pre-approved for a home loan
- Find a suitable property and perform key research
- Contact the listing agent to view the property
- Place an offer using the info gathered during the research phase
- Offer an earnest money deposit
- Allow time for the homeowner to submit the offer to the lender with the short sale package
- Wait for the lender to receive a broker’s price opinion and compare it to the offer
- Wait for offer approval or rejection by the lender
- Complete the inspection by the given deadline
With these steps completed and the offer accepted, the purchase will move into the closing phase, where buyers will receive the keys to their new property. However, it is important that all steps are followed and no detail is overlooked, which is why working with an experienced real estate agent is important.
Although buying a short sale is a complicated process, it can potentially pay off in the end. Buyers must evaluate their needs and willingness to navigate each step in order to determine if purchasing a short sale is the right choice. Upon making that decision, buyers can work with an experienced real estate agent to navigate the process with confidence.