Buying a short sale property can be a good investment because the price is well below market value. The financially distressed seller is ready to get out of the property, and the lender is eager to get the money back that was loaned out on the sale.
The Short Sale Process
Buying a short sale property can be a good investment since the property is significantly discounted below market value, and some lenders may even offer favorable financing terms. However, the process is long and complex and requires a short sale attorney to work with the lender who must approve the short sale. Most lenders will not accept short sale offers until the borrower is at least 90 days behind on payments and a notice of default has been filed. If the seller has filed for bankruptcy, few lenders will consider a short sale. A short sale is considered a collection activity, and bankruptcies prohibit collection activities. Not all distressed home owners qualify for a short sale. The lender will evaluate the home owner’s finances, hardships, loan balance, and equity in the home. If the homeowner has considerable equity in the home, the lender will likely deny a short sale on the property.
The short sale process gets more complicated when there is more than one lender involved. If there is a second mortgage or a home equity line of credit, approval for the short sale must be given by the primary lien holder, as well as the second and junior lien holders. There is also the possibility that the mortgage loan was sold to another entity in a process called securitization. In that case, approval would be necessary for that company as well.
Before a lender will accept a short sale offer from a buyer, they will require a settlement statement from a short sale attorney that shows how funds from the sale will be distributed. A settlement statement must include:
- Real estate commissions
- Outstanding liens and taxes
- The buyer’s financing source
- Proposed closing date
- Expenses that raise red flags
Most lenders prefer short sales over foreclosures which are long, expensive processes for the lender. After a foreclosure, the lender owns the home and becomes responsible for all maintenance, insurance, and taxes on the property. By agreeing to a short sale, the lender doesn’t have to pay for property expenses and their losses can be recouped much faster.