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A short sale is when a homeowner lists their home for sale, contingent on receiving approval from their lender(s) to sell the home for a price that falls short of the amount owed on the mortgage(s). It appears lenders are more willing to consider short sales as foreclosure processes and volumes become more unmanageable. If you are considering putting an offer on a short sale, here are eight questions you should ask first.
1. Is this listing a short sale?
In Virginia, sellers do not need to disclose whether the sale of their home is a short sale, and some sellers choose not to disclose this information. All listings in our regional Multiple Listing Service (MLS) contain a short sale field that has to be populated with one of three answers: yes, no, or undisclosed; if the short sale status is undisclosed, this is a red flag that the listing might be a short sale. You can also check the tax record for the home. The tax record will indicate what the current homeowner paid for the home; if the homeowner paid more for or close to what the home is currently listed for, this is another red flag that the listing might be a short sale. The last piece of information to check is the loan amount that the current homeowner borrowed; real estate agents will have access to the loan amounts that were borrowed if the original listing agent filled in these fields in the MLS when they changed the status of the listing to “sold.”
2. Is the price approved?
When a lender receives a request for a short sale, one of the first things they do is order a Broker’s Price Opinion (BPO). It helps the lender understand what comparable properties are selling for in the area. Based on the BPO, the lender will approve a price that they are willing to accept for the property. With some short sale listings, the lender has already approved the short sale price. This usually happens in situations where the home had a previous contract, a price was approved by the lender, but the buyer backed out of the contract before settlement. In some cases, the approved price is higher than the list price because the listing agent has had to lower the list price in order to attract buyers. You can always request that the lender conduct another BPO in an effort to get the lender to approve a price that more accurately reflects the current market.
3. How many loans are on the home?
Every short sale will have at least a primary mortgage loan. Many short sales also have a second loan in the form of a second trust or a home equity line of credit that has been tapped. The loan holders for all loans must agree to the short sale in order for the sale of the home to go through.
4. How many lenders are involved and who are they?
The very best scenario when considering a short sale is to have just one loan and one lender. If there are two loans, the next best scenario is to have one lender that holds both loans. The most difficult scenario to receive short sale approval on is a property that has two loans that are held by two different lenders. Historically, short sales with two different lenders are hardly ever approved; the primary lender is not willing to give the secondary lender any proceeds because the primary lender is already losing money; the secondary lender will not approve a short sale if they are not going to receive any proceeds at all. As a listing agent, I have sold homes that have two loans held by two different lenders. It is not impossible, but the hoop-jumping, negotiating, and out-of-the-box thinking required to come up with solutions that meet the needs of competing entities is great and incredibly time-consuming. Many listing agents are unwilling or simply do not have the time for this. If you are considering putting an offer on a short sale with two different lenders, just understand that the chances of approval are not nearly as good as when there is just one lender.
Some lenders are “easy to work with” when it comes to approving short sales, and some lenders have a bad track record for approving short sales. Your real estate agent can help guide you through the best course of action based on conversations they have with the listing agent, their knowledge of short sale transactions in the area, as well as their own experience in working with various lenders.
5. Have the sellers received a foreclosure notice?
One of the most illogical situations I run in to when working with short sales is the fact that a lender’s short sale department is not talking to their foreclosure department. I cannot tell you how many times I’ve heard of homeowners being foreclosed on at the very moment that the lender is also processing a request for a short sale on the same property. Unfortunately, once the foreclosure happens, the short sale is dead in the water. As a buyer, you do not want the property to go into foreclosure while you are waiting to hear if the short sale is approved so find out if the owner has received any kind of foreclosure notice, what the time frame is, and if the short sale request will freeze the foreclosure process.
6. Have the homeowners already provided the documents required by the lender for the short sale?
Most lenders will not start to process a short sale until the homeowner has received a contract. From the moment a contract is received, in my experience a short sale will take a minimum of 4-6 months to receive approval, assuming the lender has all of the other required information from the seller. The documentation that the lender requires can be quite extensive and might take some time to pull together. You want to make sure that the seller and their real estate agent and/or attorney or mediator have already pulled together and submitted all of this documentation so the process can start the minute you and the seller have a ratified contract.
7. How many contracts will the seller submit to the lender for approval?
Another frustrating situation that buyers of short sales find themselves in is having the lender approve another contract after their contract was already submitted. Because short sales take so long to approve, many buyers execute their option to void their contract rather than keep waiting–leaving sellers more vulnerable to foreclosure. Sellers sometimes try to leverage their options by either submitting multiple contracts in case they were to lose one or by submitting offers that come in later if the offer will net the lender more money. Neither of these practices is legal or ethical. There can only be one ratified contract on a property at a time, but that doesn’t necessarily stop sellers or their listing agents from doing this. I don’t think sellers are trying to be illegal; they are just trying to avoid foreclosure. Make sure you ask the listing agent how many contracts will be submitted to the bank and if they intend to continue to advertise the property in an effort to solicit higher offers.
8. What other fees, dues, or bills have the homeowners fallen behind on?
Most of the time, these answers will be found during the short sale approval process. The lender, with the help of the settlement company, takes in to account outstanding property taxes and condo or homeowners association dues that need to be paid in order for the property to transfer ownership. The settlement company is a good resource to check with to ensure all outstanding debts that could prevent settlement from occurring will be paid.
I also run in to situations when my buyers are purchasing a short sale where the homeowner has not paid their utility bills. Usually when a home is sold, the seller closes their account with the utility provider, and the buyer opens a new account with the utility provider–a process that requires no interruption in service. If the current homeowner is behind on their payments, the utility provider won’t allow a new account to be opened on the property until the debt is paid or proof is provided that there is a new owner. This means you might not have water, electricity, or gas when you first move in, and you’ll want to know this ahead of time so you can plan accordingly. In each case, I have simply faxed a copy of the HUD-1 (the settlement statement) to the utility provider right after settlement, and the new account and service are established within 24 hours.
Putting an offer on a short sale is often a great solution for both buyer and seller. As a buyer, you want to make sure you have all of the information you need to make sure you are investing your time and effort in a sale that has a good chance of being approved.
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After 3months, after my agent tell me that every was ok and aproved, by the last day they ask for a week stension, was ok, but after the stension they said the price was never aproved and they ask for 3000.00 more and a new stension. Is this ok?
Hi Maria,
Short Sales are well-known for being extended and extended and extended. Short Sales are also hard to work with because even if a buyer and seller come to an agreement on price and other terms, the lender doesn’t have to agree to those terms. In this case, it sounds like you and the seller had agreed to a price, but when the contract was sent to the lender for approval, the lender decided the house was worth $3,000 more. You do not need to accept this if you do not want. You can void the contract, or you can ask your agent to have the lender re-evaluate the price if you feel the price the lender came back with is too high. Sometimes lenders are not as aware of what market conditions are and need to be prompted to do more research! Hope this helps!