When a lender agrees to accept a mortgage payoff amount less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it’s called a short sale. Some investors are attracted to these deals, since they can score properties at a lower price.
Before you swim with the sharks, better learn how to swim well first and learn a few things about this popular transaction from someone who’s done it before- me!
Where to find distressed properties
Online databases, courthouse listings, legal ads, and calling real estate agents are some of the mediums you can use to get information about distressed properties in your area.
Learn all you can about the property
As their first task, seasoned buyers of distressed properties always ask how much the remaining debt on the house is in contrast with its approximate value.
If the debt is higher than the value, investors usually put an offer on the property immediately, because they assume that the seller will accept it outright. Houses being sold on a short sale have been in the market for quite some time, and when the seller comes across an offer which is close to the debt they owe, they settle for it to get the whole process over and done with. However, if there is a lot of equity left in the house, pass on the property for now, since lenders usually prefer to foreclose on these properties, then sell it at a price which is closer to its market value.
It’s also important to find out the actual condition of the property. Take a few minutes off your schedule to make a physical inspection of the place. Are there big and noticeable structural damages on the house or is it still liveable? Finding the answers to these questions is very important, since renovation costs are also factored in your final decision, especially when you are planning to sell the property for a profit.
You’ll also have to find out if there are any existing liens on the property. If there are none, then the sale will be a breeze. But if the lien is given to a third person, you’ll experience restrictions on what to do with the property.
Contact the lender
Unlike in regular sales, contacting the lender of properties sold on a short sale is very important. Proceeds of the sale are diverted by the seller to their existing debt, that’s why it is ideal to discuss the details of the mortgage with the lender. Just don’t forget to secure a notarised authorisation letter from the seller before you start calling up their lender.
Assemble the proposal and negotiate
A proposal consists of several parts namely: the application, an authorisation letter, the purchase and sale contract, a hardship letter, a statement of the property’s value, a detailed list of cost and liability, as well as a settlement statement.
A hardship letter is very unique to short sales. Prospective buyers use this to convince lenders why they should agree to the transaction. To make their case, buyers present evidence on why the seller has failed to make the payments on time and why the seller can no longer pay the debt in full.
Divorce papers, evidence of job loss, delinquent accounts, utility shut-off notices, car repossession paperwork, last two years’ tax returns, recent pay stubs and recent bank statements are some of the evidence attached to this correspondence.
I’m telling you right now that there will be a lot of negotiations before you can wrap up a short sale. Lenders often present counter offers, so that they can secure a fair price for the property. It’s also important that all the three parties – the lender, the seller, and the buyer – agree to the terms, otherwise the deal will break down.
I hope this glimpse into short sales helped you gain some insight into this fairly popular way of buying properties.