Buying a short sale can be a great way to get a good deal on a property. There are some unique qualities to a short sale purchase, and I find the experience of buying a short sale can go much more smoothly (and happily) if the buyer is prepared for what to expect. Following are some of the details and helpful suggestions regarding short sales that I share with my buyer clients.
This charming home was a short sale that closed last year. The house was cute-as-a-button and was well cared for, although it did need some updating
What is a Short Sale?
A short sale is a transaction in which a property is sold for less than is owed to the mortgage holder. In this case the lienholder (the mortgage holder) will allow the property to be sold even though the mortgage is not being completely paid off. The difference between the sales price and the amount owed to the lienholder is called the deficiency.
The lienholder may require the seller to pay back the deficiency at some point, or the lienholder may decide to release the debt and then after the sale the seller will not owe the lienholder any more money. (There may be tax implications for the seller if the debt is released, and if you are seller considering a short sale, it is a good idea to discuss this with a tax expert.)
The Short Sale Process
In a short sale purchase, the buyer’s offer is first submitted to the seller, who then decides whether or not to accept the offer. Once the buyer and seller come to an agreement and the offer is accepted, the seller’s agent will submit the offer package to the lienholder.
The lienholder will then go through their own short sale review process, and decide if the contract is acceptable to them. They may accept the offer, or outright reject it, or come back with a counter offer (usually asking for a higher price or an adjustment of terms).
If there are additional liens on the property besides the primary lien, those additional creditors will have to approve the short sale as well. If there are many liens on a property, this can make the short sale more complicated, and it may take longer.
Once all the lienholders have approved the short sale, the seller will decide if all the lienholder’s terms are acceptable. If the seller finds the terms acceptable, escrow is opened and a normal escrow process begins.
Buyer’s Right to Cancel a Short Sale Offer
In Hawaii there is language in our contract that allows a buyer to cancel their short sale offer any time prior to receiving notice that the seller has accepted the lienholder approval of a short sale. Because the short sale approval process can take such a long time, buyers do sometimes find other properties while they are waiting, or their circumstances may change, or they just may lose interest.
Making Backup Offers on Short Sale Properties
Since it is not uncommon for buyers to cancel their short sale contracts, this can be a good opportunity to write backup offers. If you find a desirable short sale property that already has an accepted offer, but has not yet received lienholder approval, you can often submit a backup offer. If the backup offer is accepted, you just wait in backup position. If the current offer (or all offers in line ahead of you) cancels then your offer moves into “first position” and you proceed with the short sale approval process. This may seem like a long shot, but often times the buyer who closes on a short sale is not the first buyer (or even second, or third) who was in line.
Have Your Financing in Order
When you submit your short sale offer, the lienholder will want to see that you are prequalified to get a loan, and they will also probably want to see a proof of cash funds, showing you have available funds for whatever cash you will be bringing to the purchase. Then, while you are waiting for approval it would be a good idea to connect with your mortgage broker and make sure everything is in order and ready to proceed quickly once lienholder approval is received.
Often times the lienholder will expect the closing to occur within 30 days of their approval – this is fast for Hawaii, usually it takes 45 days to close an escrow here if there is a mortgage involved. The lienholders will often allow for an extension if needed to allow time for the loan, but ideally it is good to have everything in order and ready to proceed quickly.
These are Distressed Properties
Short sales are usually distressed properties. At some point the seller has probably stopped making payments on the property, and they may have also stopped doing basic and/or major upkeep. There can be all kinds of deferred maintenance. Sometimes short sale properties are in very good shape, sometimes they need a little work, and sometimes the need for repair is extensive.
Don’t expect the seller to make any repairs, or to make any financial contributions for repairs. If there are repairs needed they will most likely be the responsibility of the buyer.
Inspections are Very Important!
Usually the buyer will do their inspections during the escrow process, after lienholder approval has been received. It is possible to do inspections before lienholder approval as well. It is always advisable to have a professional home inspection. You can also have other inspections done, like mold inspection, or cesspool/ septic inspection, for example.
In a short sale, if there are repairs or issues that come up in the inspection process, you will need to decide if you are comfortable with what needs be done, as you will probably be responsible for these repairs. If there is a major issue that substantially affects the value of the house, you can try to go to the lienholder with a request to reduce the sale price because of this. Sometimes the lienholders are willing to adjust the price accordingly.
Patience, Patience, Patience
As a short sale buyer, you will need to be patient. There is not a lot to be done on the buyer’s side of the short sale while waiting for lienholder approval. The seller’s agent will be communicating with the lienholder(s) and working on getting through the approval process. This can take a while, anywhere from a few weeks to several months, or sometimes much longer. During this time, there is not much for the buyer to do except wait. Once in a while, however, the lienholder may request some information from the buyer, and if this happens it is important to get the request taken care of right away.
It can help to remember that the lienholders just don’t always act in ways that seem practical or make sense. They often change their policies, and their internal process can be complicated. Sometimes during a short sale, a file may be reassigned to different processors several times, and each one has different expectations. At some point in a short sale (or at many points) most parties will probably get frustrated with the lienholder(s). This is where patience is importance. If you are getting a property at a good value, just remind yourself this throughout the process.
It is important to take care of all requests quickly. The lienholder can take weeks to respond to any kind of request, but when they ask for something they usually require a prompt response or they may reject the short sale. Periodically the buyer will need to sign documents or provide new or updated information – this should be sent in right away.
When a property is listed as a short sale, it is also possible that it is facing foreclosure. If foreclosure is imminent, the lienholder may choose to delay foreclosure to allow the short sale to happen. Sometimes the leinholder will choose to allow the foreclosure to proceed, in which case the short sale process would be terminated.
While the lienholder is going through their approval process, the seller’s agent will probably reach out to the buyer’s agent with periodic updates. If you are a buyer in the midst of this waiting process and you haven’t received an update in a while, it’s a good idea to have your agent check in with the seller’s agent for a status update. I would suggest a weekly check in, just to confirm that everything is on track and to see if there is anything needed from the buyer’s side.
Eventually the lienholder will provide a response. They will probably either approve the contract or send a counter offer (usually with a higher price). If they ask for a higher price, it is up to you as the buyer to accept that price, or to counter back with a different price. If the lienholder counters with a price that is too high and unreasonable compared to the comparable sales, there is usually a process to get them to review the comparables and reconsider their price.
Once the lienholder approves the short sale, the escrow will proceed as normal. Sometimes the leinholders will only allow 30 days for closing. Usually here in Hawaii it takes 45 days to close if the buyer is getting a mortgage, so everybody needs to move quickly to get everything done in 30 days. As mentioned above, if extra time is needed to complete the mortgage, often the lienholder will allow an extension for that.
It may sound daunting, and there can be frustrating moments, but buying a short sale can be rewarding. Short sales provide opportunities for buyers to get properties at good values. There are currently a number of short sales available on Kauai, in a variety of price ranges.
If you have questions about short sales please feel free to reach out to me, and if you are interested in purchasing or selling a short sale property on Kauai, I would love the opportunity to help you! You can email me firstname.lastname@example.org, or call me at 808-936-7386.