Purchasing Pre- Foreclosure Properties
Pre-foreclosure properties are called short sales and they can provide a good bargain to a buyer. If a home is listed at a low price for the neighborhood, ask your agent to call the one listed and see if the home is, indeed, a short sale. Short sale properties can be problematic. The escrow period is often lengthy and buyers may wait any average of from four to six months, or even longer.
What’s a Short Sale?
The lender for a property will accept a discounted payoff amount if they take a short sale. The lender may not accept your offer for the property, even though the seller does. Any seller does not have to be in default for the bank to offer a short sale. This type of sale may be offered because the property’s value has fallen. The home seller may owe more than the home is worth, so a good discount could make it in keeping with market value, but not below market value.
Check Public Records Before Offering
Always research before leaping in with an offer. Your agent can help by finding out how much is owed to the lenders, who has the title, and if a foreclosure notice has been issued. You need this info so you can make a good offer. If the home has two mortgages then there may be a problem. The second lender may not want a foreclosure. Say the current owner owes $150,000 on the first mortgage and $50,000 on the second. If $150,000 is the offer then that leaves the second lender with zero. The first lender will have to work out a deal with the second lender.
Get a Short Sale Experienced Agent
If your agent hasn’t done any short sales, then it’s not in your best interests. An experienced agent will know all of the important details, timelines, things needed from you, and much more. Short sales can be complicated.
Getting the Property & Seller Qualified for a Short Sale
Lenders won’t agree to a short sale unless the seller doesn’t have any equity. They also won’t agree if the seller can’t repay the amount of difference between your price and the pre-existing loans. Sellers also need to give the lender a hardship letter. This could be that they lost their job, or have experienced large medical bills.
Sellers may still owe taxes on the total of the debt which will be forgiven. Bribes are not allowed and should be avoided at all costs. Don’t be dragged into any seller shenanigans. If the seller’s home is in short sale then they won’t be receiving any of your purchase money, as the lender is losing money.
Four Potential Short Pitfalls
- Submit purchase offer & documentation to lender. Once the seller agrees, send it off to the lender to approve. The lender has to accept before you have a deal. Send the lender a copy of the check you wrote for earnest money. The lender may ask for more. Show your preapproved loan letter to the lender. Your agent can also send them a list of comparable sales in the area and which support your offer price.
- Allow time for the short sale lender to respond. Always make your offer with the allowance that the lender will accept. You can set a limit to the time you want to wait to hear from the lender, and after which you may cancel. Some short sales are sent to lender committees, and a decision will usually come after two or three months. Always get a hone number and name for the contact at the lender. Never send your offer off willy-nilly without it being sent to an individual officer.
- Learn about short sale commissions. The lender pays the commission. The seller won’t have any money to pay a commission. The lender may negotiate their commission with the listing broker and they will share with your own agent. Ask if your agent will waive any differences in commission if you’ve signed an agreement, or you may have to pay that amount out of pocket.
- Always secure the right to inspect if you want to. Lenders do not normally pay for items that a seller would pay for. These could be things like pest and termite reports, buyer credits, or a home protection plan. Buyers will purchase short sales under “as is” conditions. This means no repairs paid for, so if you want to get a short sale, always have a home inspection done.