Short sale transactions are complex. The short sale buyer does not have the luxury of signing a contract, getting a loan, and then sitting back and simply waiting for a sale to close. The short sale purchaser must, with the assistance of the purchaser’s team of real estate professionals, make a number of strategic decisions along the purchasing process.
The Offer Process
Most short sale buyers are drawn to a short sale for one reason: price. The prospect of a bargain price lures buyers to the short sale arena. Once there, a buyer needs to do some homework to determine whether or not the “costs” of a short sale will result in a bargain. With the help of a real estate broker or an appraiser, a buyer should determine an acceptable contract offer price and will submit an offer to the seller. Short sale offers are generally made “below market”, however, there are trade-offs for a good price and these offers usually lack some of the contractual protections or provisions found in a standard third party sale. Most short sellers will also require, in addition to a contract and earnest money, some indication of the buyer’s ability to purchase, such as a bank statement showing proof of funds or a pre-qualification letter from a mortgage lender. Once the offer is accepted, the buyer cannot relax just yet. Until the seller’s lender approves the short sale transaction, the seller does not have a right to close.
The Contract
In a standard purchase and sale transaction, after a contract is accepted, there is typically a time period during which the buyer can conduct an inspection of the real estate and have an attorney review the contract and suggest contract modifications. Many short sale buyers do not wish to spend time or money performing an inspection or having an attorney review a contract before the seller’s lender has approved the transaction. In these cases, it is common to “toll” the attorney modification and inspection periods until some time after the sale has been approved. Many short sale sellers will oppose such a provision, as they usually do not wish to engage in the long process of obtaining short sale approval only to have a potential buyer quit the transaction long after it begins. In addition, if a purchaser delays in performing an inspection, it is almost certain that the short sale lender who has issued an approval of the transaction will not allow the buyer to request any repair credits. It is critical for a short sale buyer to consult with a real estate lawyer to obtain counsel on the various customs and practices involved in a distressed sale. A real estate attorney will be able to explain the short sale process from a legal standpoint and identify potential concerns to a short sale buyer.
The Loan
Just as a purchaser of short sale real estate does not wish to expend time or money on attorneys and inspectors, that same buyer obtaining a loan to finance the purchase of distressed property may not wish to begin the short sale process in earnest until the seller’s lender has provided a green light to the transaction. Unfortunately, some short sale lenders provide only a short time window to close after an approval is granted and, unless the buyer is prepared, the time allotted to complete the transaction may expire before the buyer is ready to close. Buyers should work with a competent mortgage broker or lender, paying close attention to the loan professional’s requirements so that a loan can be timely acquired.
The Approval
Most short sale lenders have their own set of criteria to determine if they will accept a short sale transaction. Most, if not all, will perform an appraisal or obtain a market analysis of the property value. They will look into the short sale buyer’s qualifications and will attempt to determine if there are any irregularities between the buyer and the seller, such as a related party transaction. Short sale lenders can also change the terms of a transaction. They might decline to accept a buyer’s offer but rather than terminate the deal, they might suggest a counter-offer. This may take many forms, such as a renegotiation of credits, purchase price, or costs payable to service providers. At such a point, it is crucial for a short sale buyer to obtain the counsel of an experienced attorney at law to understand the risks and rewards of proceeding with or terminating a transaction.
The Closing
As the entire process winds to a close, the short sale purchaser should be accompanied at the closing by an attorney. The typical purchaser needs an attorney at a standard closing to understand the complexities of the transaction and to handle any problems that may arise. During a short sale closing, there is a title company, a seller, the buyer’s lender, and one or more of the seller’s lenders participating and none of their interests are the same as the buyer’s interest. Only an experienced real estate professional can navigate the issues affecting the buyer and offer advice on how the buyer can be best protected.
The decision to engage in a short sale transaction is not one that should be made without much research and consideration. A bargain dream home can quickly become a nightmare. With a competent and experienced team, a short sale purchaser can reduce the risks a buyer faces in a distressed property purchase.
Short sale purchasers are invited to contact us (773-399-1122) to determine if we might be a match for an engagement to represent them in a short sale purchase.
