How to Buy Short Sales

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Buying short sales can be an extremely profitable way to purchase a single property or invest in multiple properties. A short sale is a real estate transaction in which the seller has stopped making payments on the mortgage and has little, or no equity left in the property. The bank, trying desperately to avoid foreclosure (which costs them thousands in legal fees and time), frequently allows the seller to sell the property for less than the amount owed and then forgives the difference.

The Bank's Dilemma

In the bank's mind, they have a major problem if the borrower cannot make the payments. They have two choices: foreclosure or short sale. If they choose foreclosure, they spend time and legal fees, and take the chance that the property will be in sub-par condition because people who are foreclosed upon rarely maintain their homes properly. Then they need to get the property back in shape and hire and pay a real estate agent to sell the property for the most they can get in an REO situation. If they choose a short sale, the bank can allow the current seller to sell for as much as the market will permit. They pay all costs associated with the sale (which they would have to pay anyway), and get a check for what the home netted after the sale. This is a quicker solution and is often much more profitable for the bank. It is also a better solution for the seller who is in danger of being foreclosed upon.

Finding and Buying Short Sales

To find short sales, your best bet is to hire the services of a real estate agent who specializes in them or at least has a very good grasp of how they work. An agent who is very experienced with them will be the optimum resource to locate, negotiate, and assist you in the purchase of the property. Banks, by their nature, are very difficult to deal with and take an extremely long time to make decisions about the price they will let their homes sell for. The Loss Mitigation department of the bank that is servicing the loan will be the department handling all of the bank's deals in relation to short sales. It is in charge of getting the best terms for the bank and getting as much out of the assets they are in charge of. Many times, the loss mitigators will make bonuses for maximizing the amount they get for the properties that they are currently taking offers on. A sharp real estate agent will be your best asset, representing you to the bank and negotiating for the best terms on your behalf.

The Short Sale Process

The short sale process is very detailed and every bank does things differently, so this should be looked at as a general guide, but for the most part this is the basic routine that occurs when buying a short sale. First, an offer is submitted to the seller (who is still in control of the property). The seller has to sign off on the offer. As a buyer, you will need a iron tight loan approval because the bank will often not even look at an offer if they fear a buyer is not qualified. After you submit the offer and the seller signs off on it, your offer with loan approval will be submitted to the bank. It will take typically 3-6 weeks for the bank to respond to the offer. During that time, the bank will order an appraisal of the property to establish what the fair market value of the property is in its current state and marketplace. They then put your offer in line on a loss mitigator's desk. These mitigators handle all the offers and review them for the bank, and because they handle sales for the entire country, they are typically very backed up and take a long time to respond. Once they do respond, they will most likely counter the offer submitted because they want to get the buyer to offer the most money for the bank as possible. Here's where an experienced and competent real estate agent will help you to deal with the bank and negotiate terms in your favor -- not the bank's.

When all of the terms have been agreed to, the offer now becomes a contract and escrow timelines start. (Escrow actually is opened at the time of the initial offer that is accepted by seller but hasn't yet been submitted to bank.) Most buyers will request a home and termite inspection, which are conducted in the same manner as any regular real estate deal. The hang-up many times is that any issues (and there will be issues) that are found with the home will not be able to be fixed. In most circumstances, the seller has no money to make the repairs. Buyers who buy short sales should place offers low enough that when small issues are found during inspections, they are ok with proceeding to close. If large, major issues are present in the home, it is most likely best to go back to the bank and ask for repairs or just cancel your contract and find another property. After inspections are complete, the short sale follows the same closing activities as a regular sale does.

Buying short sales for either a residence or investment is a great way to buy a property significantly below market values. It's most important, especially if this will be your first short sale transaction, that you enlist the services of a real estate agent who knows the process. These types of deals are typically long and stressful due to the seller's financial situation, which makes things difficult. Overall, many short sales can be purchased for 10%-20% below market and in many times great shape with few repairs needed vs. foreclosures that typically need extensive repairs.