10 Risks in Buying a Short Sale Home or Foreclosure (VIDEO)
The home seller avoids foreclosure and has an easier transition to move into affordable housing. The lender also takes a financial loss, but usually not as large of a loss when one forecloses on the property. Foreclosures are expensive and time-consuming, so by agreeing to a short sale, the lender is accepting the inevitable and trying to minimize losses. The lender also sees a short sale as looking good on paper, because the property never gets listed, unlike a foreclosure, and this helps the lender’s numbers. Some buyers have negotiated with the lender and helped minimize the damage to the seller’s credit score rating. The loan will appear as “paid” with the following notation of “settled for less than originally owed” which is far more favorable than foreclosure.
After foreclosing, the lender owns the home and must pay insurance and property taxes to maintain it. So, instead of making money every month, they now have the extra responsibility of putting out money. Most lenders move too slowly and the short sale ends up falling apart, so be sure to do everything you can to get the lender to move quickly. A short sale may still appear and impact the homeowner’s credit record. You walk away without a penny from the deal, making it more difficult for you to find another place to live.
Reasons Why Lenders Will Not Approve or Consider a Short Sale
The lender can and will hold the borrower responsible for every penny owed. When the seller files for bankruptcy, few, if any, lenders will consider negotiating a short sale because negotiating a short sale is considered a collection activity, and these are prohibited in bankruptcies. Second or junior lenders will also absorb most of the loss. And a home equity line of credit requires approval from all.
1. Put Your Finger on the Short Sales
A short sale requires the necessary attention from an experienced agent or an attorney. Determine how much is owed on the house in relation to its approximate value. Locate pre-foreclosures by using online databases, or consult with a realtor who has proper training or a good track record in handling short sales. When it’s high, it is a good candidate because the seller will have more trouble selling it for enough to satisfy the loan, as opposed to an owner who has a lot of equity.
The lender is also eager to get the money paid back to them that they loaned out, making them sometimes offer more favorable financing terms. When buying a property that is undergoing a short sale, you will get the property for a substantial discount. And you will mostly like to have cooperation from the seller because they are involved in the sale.
2. Take a Look at the Property and the Location
Make time to take a look at the property and the location. Figure the value of the property and comes up with a rough estimate of the amount of work and how much it will cost to renovate.
3. Calculate the Profit Margin
When you are an investor or a homeowner planning to live in a home for even a short time, you will want to profit from the deal. Do your research on what the property is worth and the profit potential.
4. Liens and Mortgages
Be sure to find out of any liens through the seller or his agent and which lender is the primary lien holder.
5. Get in Touch With the Lender
It is usually of the biggest initial challenges- to find the final decision-maker. Be sure either you or your agent speak with the loss mitigation department or even the resource recovery department rather than look into recouping the past due to loan payments.
6. Complete the Lender’s Short Sale Application
Most lenders have an application-specific for a short sale.
7. Proposal
The lender will need to see a sizable down payment, and a sizable amount of money posted to approve the short sale and it is essential to have the lender contingent upon approval in writing.
8. Write a Hardship Letter
The lender will not discuss a short sale until the homeowner has fallen behind on payments, usually, for 90 days. The lender must recognize the seller’s inability to pay the loan, and see that the situation is irreversible. To make the case, it must start with a letter written by the seller to give an overview of their situation. The seller should provide details, such as documentation and as much evidence as possible, ie. divorce papers, evidence of job loss, or delinquent accounts, utility shut-off letters, car repossession notices, last two years of tax returns, recent pay stubs, and bank statements.
9. Compile a List of Problems
Is it an appraisal or a broker’s opinion? The lower the estimate, the better it is for the buyer. Compile a list of problems the home has and show the lender and the seller that they would not get enough for the home during a normal sale to satisfy the loan. This part is critical, and Richard Geller, of MortgageReliefFormula.com, recommends doing this before the lender performs a valuation.
10. Details of the Costs and Liabilities
Convincing the lender they are better off with you taking the property off the seller’s hands, all the better. Taking photos of property damage and getting estimates of the property is also a good time to take a better look at the property and decide on whether the money and time spent fixing it up are worth it.