Purchasing a Short Sale can be your way to take advantage of today’s very low mortgage rates as well as Denver’s mortgage crisis related inventory. Unfortunately, there are quite a few incorrect beliefs and practices about Short Sales by Buyers, Sellers and even real estate practitioners.
I’m writing this short sale article and pre-empting my explanation of the FHA Secure program because I read a post this morning from a very experienced Denver broker and blogger who has a few key errors in his explanation of short sales. I get the feeling he is writing about his first experience representing a Buyer through the short sale process. It’s outside the scope of my reach to help this broker with his transaction but I do want to correct some mistakes that are out there. 
I’ve accomplished well over a million dollars in short sales this year representing both Buyers and Sellers and have learned the process inside and out. I’ll write a more comprehensive Short Sale resource shortly and post it as an entire category on www.DenversRealEtsateNews.com since there are more and more Buyers and Sellers who are taking advantage of short sales every day.
What can a Buyer reasonably expect to occur with a short sale and what are some best practices that any broker can apply so a Buyer can be represented effectively through a challenging process?
In general I find that Buyers aren’t actively using the term “Short Sale” in their initial search criteria. A quality Buyer Agent should, as part of their discovery interview with a buyer, explain the availability of short sale listings as well as the process of procuring one. Without a doubt, having realistic expectations and some front-end knowledge of the process will go a long way in improving your experience as a Buyer.
Having a specifically experienced Buyer’s Agent to properly represent you is essential in this process.
A functional definition of a Short Sale is any transaction in which the proceeds of the sale fall “Short” of the outstanding balances of all liens and encumbrances. These liens are most often the first mortgage and second mortgage but can also include Home Owners Association liens or mechanics liens.
When it comes to distressed sales there are several benefits to a short sale over an REO (Real Estate Owned by a bank) sale or a foreclosure:
1.) The owner is typically still living in and maintaining the home;
2.) The owner usually still has some pride of ownership and in most cases cares for the property up until and during move out;
3.) The home has not sat vacant or begun the “wasting” process associated with not being lived in;
4.) The home typically has not been winterized (plumbing off and drained) which facilitates a whole house inspection;
5.) In the negotiation process all liens and encumbrances are resolved and future claims by lien holders are insured against by the title insurance
A short sale compared to a sale in which all lien holders are paid in full (a more traditional sale) has one significant benefit: The price can frequently be significantly lower than comparable homes for sale.
How Do You Get Your Hands On A Short Sale?
At first it’s fairly easy and the home search process is no different than for any home. First you’ll find the best home for your needs, then determine if it’s a short sale. In most cases the possibility of a short sale will be disclosed to your agent through the MLS—it’s an MLS requirement. However some listing brokers may not fully understand whether a sale at a given price will cause a short sale. As part of your preparation to make an offer a good Buyer Agent will research the outstanding liens through an ownership and encumbrances report and determine if the available proceeds from any offer will require a short sale negotiation.
It is imperative for your agent to determine if the offer you plan to negotiate would cause a short sale since this would significantly change both your offer strategy and forms used.
Common Fallacy #1 It is difficult or a lengthy process to get a short sale under contract
Fact: It is, oftentimes, very easy to get a property that is going to require a short sale negotiation under contract. Keep in mind that a Seller will never net any money from the sale of their home if it is a short sale. For this reason alone it is very easy to negotiate the initial contract and take the home off the market.
A good buyer agent may have an attorney craft specific language in the initial offer requiring the seller to cease marketing the home if the contract is acceptable to the Seller. This language can be effective to preserve your ability to close on the home if the short sale is approved. A disappointing let down can occur if you have been patiently waiting for the lien holder’s approval and a new offer comes in higher than yours.
The Short Sale Addendum
This new form was approved by the Colorado Real Estate Commission to help clear up some of the contract problems with short sales. As a real estate broker and not an attorney I can’t advise on the consequences of the form but I can certainly help you fill in the blanks to best preserve your rights in the contract. This form helps put some teeth into your offer and among other things provides a specific time frame for submitting the contract to the lien holders. Unfortunately, if you are the first offer submitted it is very possible that the listing broker has not prepared a submission package for the lien holder(s). This is one time that a good buyer agent can expedite the process. Communicating early and often with the listing broker your agent can assure the offer is submitted quickly to the lien holder.
Common Fallacy #2 A buyer must get an inspection before the final short sale approval
Fact: A Good buyer Agent can manage the deadlines for inspection in such a way that you do not need to incur the inspection expense until after the Short Sale Approval has been procured.
This is a prime example of how an experienced Buyer’s Agent can save you money.
Commence Waiting
Beyond managing dates and deadlines the process is now in the hands of the lien holders. The agents should have a systemized process of making contact with the lien holders on a DAILY basis– and in some cases several times a day. Constant contact with lien holders can keep your contract at the top of the workload pile. This is often times where a novice or unprepared listing broker can let the transaction fall through the gaps. Lets face it– brokers need to be managing several transactions at a time to be profitable. An agent without an assistant or two or three specifically handling short sales will have a very difficult time juggling the need to be out showing homes to new clients and the fact that calls need to be made to lien holders. It is common to be on hold for HOURS just to get any feedback from the representatives at the lien holders!
Nevertheless, be prepared! It is very uncommon for a closing to occur within 45 days of making your offer and many times escrow can take as long as 100 or more days even when the listing broker is calling every day!
In conclusion, a short sale purchase can be an extraordinary bargain in a market full of bargains! To get started give us a call at (720)273-4262 or just begin searching. http://www.denversrealestatenews.com/search-denvers-homes-for-sale-with-research-tools/
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Real Estate Guy,
I tried to buy a short sale but we never got a response from the Bank. How often do short sales get approved and how often do they fall through?
Hi Matt,
Your experience is not unusual. It’s not uncommon for a bank to get overwhelmed with the number of files each loss mitigator is assigned to. It is essential to have a proactive listing broker to maintain constant contact with the bank– and frequently, a very persistent Buyer’s Agent to remind the listing broker to keep calling the bank. I find it very helpful to get the listing broker to submit a third party authorization form to the bank authorizing the bank and I to talk about the file. This way I can make sure the file submitted is 100% complete and any delays are related to case load and not to incomplete submissions. I’ve circumvented several delays this way (by catching and submitting a missing form or updated contract document)
I hope this helps in the future!
-Bob
Denver’s Real Estate Guy
One thing is clear: the buyer and hsi agent had better not be short on patience.