1. What is a short sale?
Lenders that loan money secured by a lien against real estate have a right to require the
underlying loan to be paid in full before they release the lien. A short sale, then, is a sale where the lender agrees to accept less than the full amount necessary to pay the loan in order to get the lien released. Lenders will agree to do this when the seller needs to sell the house and its current value does not support a sales price high enough to pay the loan in full.
2. Why buy a short sale?
Simply put, a short sale can be a good deal. Almost by definition a purchaser is paying substantially less than the house sold for only a few years prior and less than the amount necessary to pay the loan.
3. Are there any disadvantages for a buyer on a short sale purchase?
Since lenders are not obligated to agree to accept less than the full amount necessary to pay their loan there is always a chance the deal will fall through at the last moment. So the only real downside is the risk associated with losing the house you want to purchase through no fault of yours.
4. What can I do to protect myself?
First, you should manage your expectations and realize the deal might not happen. Do not make firm plans based on the transaction occurring, e.g. hiring movers, switching schools, etc. Second, hire knowledgeable professionals to help you through the process. Lytle Title and Lytle Law are very familiar with short sales and will be happy to assist you in your closing. Third, if you choose to use Lytle Title and Lytle Law then I will be happy to assist your agent with drafting a clause for your contract that protects you and gives you some options. For example, I would recommend such a provision has a “kick-out” clause so that you can continue to look for suitable housing while the short sale is pending approval. Additionally, you should discuss commissions with your agent now. It is not uncommon for a short sale lender to demand that the real estate agents cut or give up their commission in order to make the short sale happen. Since your agent will have more than earned that commission in a short sale it is manifestly unfair for the lender to ask, or require, that they not get paid for what they do for a living and by having the conversation now neither you nor your agent will feel like you are in a position where the agent is the one causing the deal to fall apart as opposed to the real culprit, the short sale lender.
5. How long will it take?
The process can take anywhere from two weeks to two months. It depends on the lender and the particular requirements associated with your transaction. For example, some lenders have a more substantial loss mitigation department than others, and some lenders want a full independent appraisal to assess value, while some will require a broker’s price opinion, and some will accept and agent’s comparative market analysis. I would recommend a closing date approximately four weeks away with an appropriate provision regarding extension if necessary.
6. How do I know the short sale will be approved?
You don’t. As the information above explains, this is a lender’s call entirely. Congress has taken some action, and promises further action, that will help provide some funds and incentive for lenders to accept these short sales so the current climate for approval is much better than in the past.
Want to learn more? Download our free white paper, Frequently Asked Short Sale Questions. If you would like to arrange a complimentary consultation with an agent who specializes in short sales, email us at concierge@lizmoore.com.
