By John Adams
We all know you can get a great deal by buying a bank-owned home at a discounted price. But is there a way to beat the crowd by buying the house before it goes back to the lender? The answer is yes.
It's called a short sale and it can be a win-win transaction for all parties to the deal.
Here's how it works: A short sale occurs when a lender agrees to accept less than the outstanding loan balance as payment in full, allowing the house to sell to a new buyer for less than the existing loan amount.
While banks are understandably less than enthusiastic about such sales, they usually end up saving the bank the costs of foreclosure, repairs and resale fees.
- Find short sales through real estate agents.
Short sale offers are usually presented to lenders by real estate agents who are experienced in the process.
If the agent can convince the lender that a foreclosure is imminent and that the lender is going to lose a lot of money on the eventual sale of the house, the bank may agree to accept less than the full balance of the loan as a payoff.
Lenders will only consent if they believe this course of action will result in less of a loss for the bank. And in today's slow sales environment, that's a fairly easy case to make.
- The lender must agree to the payoff.
One of the biggest hurdles to a successful short sale is getting the lender to make a decision on any short sale offer you might make.
And because the process of getting to a closing can be an extremely difficult one, it pays to work with an agent who is a short sale specialist.
While there is little anyone can do to move a bank forward in the process, a persistent agent can try to get all the required paperwork submitted in a timely manner. And yes, there is a remarkable amount of paperwork required. Remember, you are dealing with a bank.
- The seller just walks away.
Perhaps the biggest challenge to this transaction is this: The bank will require that the seller (i.e., defaulting borrower) prove that he has no assets and no income and that he has suffered some grievous misfortune that prevents him from paying.
I have never understood what difference this makes to the bank, but they consider it critically important. Proving financial hardship is an art form all its own. Experienced agents are adept at creating an image of heart-wrenching insolvency.
In addition, the homeowner cannot benefit financially from the sale of his home. In other words, he will get nothing at the closing table. As a result, the homeowner has little incentive to participate in the short sale.
And if the bank discovers that you have compensated the seller in any way, they will revoke their agreement to participate in the sale. This is where the patience and professionalism of the facilitating agent can make all the difference.
To make matters worse, the bank may or may not release the original borrower from liability for the loss experienced by the bank. This should be negotiated in the short sale offer.
- Junior liens must give consent.
If there are junior liens, such as HELOCs or a second mortgage, or if there are unpaid taxes or mechanic's liens, then the short sale must be approved by all of them before the sale can go forward.
Understandably, they also want a piece of the pie.
- There is a high failure rate.
The majority of attempted short sales end up in failure due to the fact that it can take up to 12 months for the transaction to be approved. Most buyers are simply unwilling to wait that long to buy the house and the seller can change his mind up until the last second.
In addition, the lender's attorney is usually threatening to foreclose on a monthly basis and is often unwilling to cooperate with the short sale process.
- Have your own attorney.
Finally, make sure you obtain solid legal advice during these transactions. Short sales are not your typical home-buying experience.
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John Adams is an author, broadcaster and investor. He answers real estate questions submitted through his website and in this column. For more real estate information or to make a comment, visit www.money99.com.
