While short sales are less common in the US housing market today than a decade ago, many people are still selling and buying a property through a short sale. Real estate investors, especially, think of short sales as opportunities to score property investments below market value. However, although it’s been around for decades, many are still intimidated by the short sale process. Perhaps you’ve heard stories about short sales that took over seven months to complete or, worse, failed to sell and got foreclosed.
These kinds of stories make buyers shy away from buying short sale homes, despite the great deals out there. And as a seller in distress, not knowing how to navigate the process combined with the fear of foreclosure will stress you out even more. As a result, it’s crucial for you to understand how the short sale process works. Whether you’re a seller looking to break free of mortgage trouble or a real estate investor looking to buy an investment property via short sale, here’s a step-by-step guide to how to complete the process successfully.
The Short Sale Process for Sellers
Step 1: Identify the Current Situation
The homeowner/seller initiates the process. Once you’re aware that you’re facing financial hardship and lack the ability to keep up with the monthly mortgage payment, you may consider a short sale. However, you shouldn’t always assume that selling via a short sale is the only solution. You could be eligible for the Home Affordable Modification Program. This program helps financially struggling homeowners avoid foreclosure by modifying their loans to a level that is more affordable and sustainable over the long term.
If you’re eligible for HAMP, your lender will put you on a 3-month trial to show that you can make timely payments at the new monthly payment level. Once you make it through the trial, you may have a new mortgage payment and, therefore, avoid moving ahead with the short sale process. If a loan modification is not an option for you, you can move forward with a short sale.
Step 2: Speak With Your Lender
The next step is to get approval from your lender to sell your real estate property for less than what you owe on your mortgage. As you can expect, lenders aren’t overly fond of the idea of conducting a short sale. For the lender to agree to a short sale, they’ll want proof that this is a better option than a foreclosure. Also, a lender will pre-qualify the homeowner and wants evidence that:
- The real estate property is worth less than the outstanding debt and closing costs
- The borrower is already, or will inevitably be, in default of the loan when they ask for a short sale
- The borrower is facing a hardship which is preventing them from meeting loan obligations (such as unemployment, divorce, medical emergency, or bankruptcy)
- The borrower doesn’t have enough income or assets to pay off the loan. Assets include anything of value that can be used to pay the loan like other real estate, investments, or available credit
You’ll need to send the request to the lender in writing with proof of the above. Note that if there’s more than one loan on the property, you must make this request from all of the lenders. If the lenders are convinced that the seller is incapable of making future payments and that there’s no way to up their money with a regular sale, they’ll approve for the short sale process to move forward.
Step 3: Contact a Real Estate Agent
Of course, you’ll need a real estate agent to sell your short sale property. And since real estate short sales are complex, the next step for the seller is to contact an agent who has experience in the short sale process and a track record of successfully selling short sale properties to handle the deal. Once you reach out, the agent will then review your financial situation, perform a comparative market analysis (CMA) and request for an appraisal to find the property’s value and come up with the best price for the short sale listing.
Furthermore, you’ll need to sign a written authorization. This gives the real estate agent the authority to contact your lender on your behalf, have the lender send a short sale package, and list the property for sale at the low end of fair market value. An experienced real estate agent will also help you in the next steps of the process of selling a short sale home.
Step 4: Gather Appropriate Documentations
The next step is for the seller to send lenders a short sale package. This includes hardship papers, bank statements and account information, income statements, copies of bills and various expenses, property taxes, asset disclosures, and more. Lenders will review the provided information and perform their own due diligence. Keep in mind that in this step of the short sale process, lenders either don’t respond, reject the offer outright, reject the offer but detail what to change and terms they’ll accept, or accept the offer as written. If approved, lenders will issue a short sale approval letter outlining the terms of the deal. If necessary, your agent can negotiate with the lender on any desired changes to the terms of the approval letter.
Step 5: List Your Property for Sale
After settling all details regarding the terms, your real estate agent will list the short sale property for sale. The agent is also responsible for marketing the house and finding a buyer to get the house under contract. This is where the short sale process stops from the seller’s end and begins for buyers.
The Short Sale Process for Buyers
Step 1: Identify Potential Short Sale Opportunities
Buying an investment property through a short sale is different from buying at a real estate auction or a bank-owned home (known as an REO property). So, during your property search, make sure that you’re targeting the right type of property. You can do that by locating pre-foreclosures in your area by checking online listings, searching courthouse listings, legal ads or using an experienced buyer’s agent.
At Mashvisor, we help real estate investors quickly find the best investment properties for sale that match their criteria and personal preferences. Try using our property search tools to find a short sale investment property in your city of choice!
Step 2: Do Your Research and Home Inspection
As with all real estate investment opportunities, you need to do your research and due diligence before moving forward with the short sale process. Once you’ve identified a short sale property listing, make sure that you visit the house before anything else to do a home inspection. This helps real estate investors in estimating how much it’s going to take to repair or renovate the investment property and, thus, figure out what’s the right offer to make. Furthermore, try to find out how much is owed on the property in relation to its value. Plus, don’t forget to find what liens are on the house and do a title search. This ensures that there are no undisclosed liens on the property before closing.
Step 3: Perform an Investment Property Analysis
The next step is to do an investment property analysis to see how much profit or return you can expect to make from buying a short sale property. This analysis shows real estate investors the money-making potential a certain property has and, thus, allows them to make sound investment decisions. With the right investment tool, this step of the short sale process can take a few minutes to complete. For example, one of the best tools available for investors is Mashvisor’s Investment Property Calculator. This tool uses historical and predictive data analytics to show you the expected rental income, cash flow, cap rate, cash on cash return, and occupancy rate of the property.
To learn more about this tool and how it works, click here.
Step 4: Get Your Finances in Order
Now you need to start thinking of how and how much you’ll offer to buy short sale property. A real estate investor has the option to either buy an investment property in cash or take out a mortgage loan. If you’re going with the second option, you’ll need to get pre-approved by a lender. In general, lenders want short sales to be closed in as little 20-30 days once the agreement is settled. As a result, it’s important to acquire financing before contacting the seller.
Step 5: Contact the Lender and Prepare Your Offer
After contacting the seller and reaching an agreement, the next step of the short sale process is to contact the lender. You or your agent can ask for a short sale package in which you can submit your offer and send it back to the lender. This package includes:
- An authorization letter that gives lenders permission to discuss the mortgage situation with you
- The purchase and sale contract signed by both the buyer and the seller
- A statement of the property’s value or broker’s estimated price
- Details of the costs and liabilities which proves that it’s better to sell the house via short sale
- A settlement statement that outlines the purchase price, closing costs, and any other costs or fees involved in the transfer of the short sale investment property
Step 6: Submit Your Offer and Negotiate with Lenders
Once you’ve prepared your offer, you need to first send it to the seller. If the seller accepts, your agent can then send it to the lender along with the short sale package. Real estate investors buying short sale properties need to be patient as lenders will typically take their time to review the offer. So, have your agent regularly call the bank and keep track of the short sale process.
Moreover, though a seller might be willing to accept a low offer, the lender probably won’t. Meaning, you should be prepared to negotiate with the lender until a settlement is reached. As you can expect, this is the part of the process that can really hold things up. The best tip to get the approval is to offer a price that is somewhat close to the market value.
Step 7: Close the Real Estate Deal
After reaching an agreement that all three parties –the seller, the buyer, and the lender – are OK with, the rest of the short sale process is simple. The lender will set a date for closing the deal in the approval letter. On that day, the title and possession of the property are transferred to the buyer. In some situations, you may have extra steps like providing additional paperwork but, other than that, you can expect to have a fairly normal closing process.
A short sale in real estate can yield a good deal on investment property, but it generally takes time, patience, and a lot of luck. Both buyers and sellers need to be prepared for any outcome as the final say in whether the short sale will be completed goes back to the lender. Just be sure to follow these steps and research the best practices for selling and buying short sales, and you’ll increase your chances of succeeding.