How to Buy a Short Sale?

A Short Sale is the procedure in which homeowners can sell their home for less money than they actually owe on the mortgage.  A Short Sale can be a great alternative to bankruptcy or a foreclosure for a homeowner that can no longer afford to keep paying his or her mortgage.

Often, in order to avoid the significant costs of the foreclosure process, the lender will approve a short sale and a homeowner to sell the home for less than the outstanding mortgage balance, but the home must be in the pre-foreclosure stage (delinquent on the outstanding mortgage).  For more information on the what a short sale is, read google Real Estate’s article What is a Short Sale?

Buying a Short Sale Process

1. The Seller signs a listing agreement with a real estate agent subject to a short sale with a third-party (bank/lender) approval
2. The Seller finds a Buyer, or vice-versa, who makes an offer  is less than the outstanding amount of the mortgage
3. The Seller accepts the Buyer’s offer to purchase the property, but the effective contract is contingent upon the banks/lender’s approval (unless the Short Sale has already been pre-approved).
4. The Seller’s bank/lender approves the contract between the Buyer and Seller
5. The transaction is complete when the Buyer delivers the funds, the lender releases the lien on the home, and the Seller transfers the deed

The decline in market value of a property below the total debt owed on that property does not mean that the property owner automatically qualifies for a short sale. Banks/Lenders take numerous factors into consideration when determining if it will permit a short sale to occur.  The mortgage must be delinquent, in order for a bank/lender to consider a Short Sale. 

Often, the Seller of a Short Sale will guarantee that the Short Sale is “ready to go”; however, this is often not the truth.  Unless the Short Sale price is pre-approved, Buying a Short Sale can be a long, tedious process.

Buying a Short Sale: Contingencies

 A short sale cannot occur without a bank’s approval. If the bank/lender does not approve the Short Sale contract, the contract will not be valid (even if both the Buyer and Seller agree!). A well known requirement for the transfer of property is a clean deed, free of defects and liens. 

If the deed has a lien on it, the lien must be cleared prior to a deed transfer.  This is the reason why the bank/lender/lienholder must approve a Short Sale before any transfer of property owners can take place.

Can a Family Member Buy a Short Sale?

A Short Sale is supposed to occur at an “arm lengths” transaction.  This means that your family member should not Buy a Short Sale from you without proper disclosure; however, this does not mean that it does not occur.  According to the CoreLogic report, Short Sale Fraud most likely occured in ~2% of all 2010 US Short Sales.  As US real estate prices continue their decline and Short Sales expected to increase in the second half of 2011, the Short Sale Fraud upward trend will continue its course.  For more information on Short Sale Fraud, read google Real Estate’s article Short Sale Fraud.

In several cases, a family member did Buy a Short Sale from another family member.  Then, the Short Sale was sold within one week (or sooner), to the original owner, for an amount less than what his or her outstanding mortgage was prior to the Short Sale.  When a family member Buys a Short Sale, the family member usually has a different last name, in order to mask the relationship between the Buyer and the Seller. 

If a family member Buys a Short Sale from another family member, this is not considered to be at an “arm’s length” transaction.  Legally, the fact that the Buyer of a Short Sale is a family member should be disclosed to the bank, prior to obtaining the bank’s approval.  In reality, this does not always occur and many people get away with it, as it is very difficult for the bank/lender to investigate each and every Short Sale that occurs…

Prior to having a family member Buy a Short Sale from you, consult a real estate attorney for advice.  He or she will most likely advise that you disclose the familial relationship to the bank/lender, prior to receiving the bank’s/lender’s approval.  After making this disclosure, the bank/lender is more likely to “spotlight” the transaction or not approve the Short Sale at all.

How to Buy a Short Sale Conclusion

Often, the Seller of a Short Sale will guarantee that the Short Sale is “ready to go”; however, this is often not the truth. Unless the Short Sale price is pre-approved, Buying a Short Sale can be a long, tedious process.

I have personally made several reasonable offers on various Short Sales in Florida.  These were not pre-approved Short Sales, and the bank/lender never responded to my offer (it has been 2 years now).  When Buying a Short Sale, be prepared to endure a rather long, tedious process.  While this is not always the case, in my opinion, it is the norm…

Another informative article from google Real Estate.