Short Sales: Tips for Homebuyers

If you're hearing a lot about short sales these days, it's no surprise. As home values have declined, the number of short sales has exploded. In September 2010, 12 percent of all U.S. real estate transactions were short sales, according to tracking by the National Association of Realtors.

So what is a short sale? It's a way for sellers who are underwater on their mortgages to avoid foreclosure. In a short sale, the seller negotiates with the mortgage lender to accept less than what's owed on the property.
For the seller, a short sale is a way to get out from under an unaffordable mortgage. Easier and less costly than a foreclosure, a short sale also leaves the seller's credit clean in two years, after which the seller is free to again buy a home. For the lender, a short sale is a way to recoup some of the loan without the hassle and expense of a foreclosure proceeding.

And what's in it for a homebuyer?

Short Sales Can Be a Good Deal for Buyers

"You can get a property for 10 percent to 15 percent below market value," says Kerry Thornhill, with Dallas-based Virginia Cook Realtors. "There is no reason for a buyer to steer clear of short sales -- they can pick up fantastic deals."

As long as they have a strong stomach and a fair amount of patience.

Short sales can involve complex negotiation, with not just first lien holders but often second lien holders, and sometimes homeowner associations and even ex-spouses. Before a short sale can be finalized, everyone with a stake must agree to accept less than they're owed.

Example of a Short Sale

Let's say a homeowner is underwater on his mortgage, and the lender agrees to a short sale. The property has a first lien of $320,000 and a second lien of $82,000. An offer from a buyer comes in at $329,000.

In order for the sale to proceed, both lenders have to agree to the deal. In this case, the seller was lucky. The first lien holder was willing to whittle down the $320,000 note, and the second lien holder agreed to take $4,000 on an $82,000 loan.

Why in the world would the bank write off $78,000? Because in a foreclosure situation, first liens take precedence over second liens. If the first lien holder goes to foreclosure, the second lien holder likely will end up with nothing. In this case, $4,000 is better than the alternative.

What buyers need to know is that getting through this process can take a long time -- if it happens at all. The increased paperwork requirements and multiple approvals can add months to the deal.

Make Sure Your Agent Understands Short Sales

The secret to successfully buying in a short sale is having a real estate agent who understands the process and can handle all the moving parts. Knowing how to deal with the paperwork and bank bureaucracy is paramount. With bank negotiators wading through hundreds of short sales in a month, it's easy for things to fall through the cracks. Some agents with short-sale experience are credentialed as Certified Distressed Property Experts (CDPE) or National Association of Realtors Short Sale Specialists.

One of the first things that Thornhill does is secure a letter of authorization from the seller and waives that to avoid delays. The letter authorizes the buyer's agent to discuss the loan and the short-sale process with the bank. Otherwise, the lender won't disclose any information about the seller's loan. "Every time I call into the bank, they have to make sure they have a complete file and that authorization."

Keep Your Short Sale Expectations in Line With Reality

When he markets short sales, Thornhill says, he usually gets two kinds of buyers: one who believes that the short sale process will take forever, the other who thinks he can get a home for 50 cents on the dollar.

The truth, he says, lies somewhere in between. A short sale can potentially provide some of the best real estate buys around. Don't be afraid to go after them, as long as you have a seasoned agent to guide your way.

For more about short sales these AOL Real Estate guides can help, whether you're buying or a selling:

More on AOL Real Estate:
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