How To Buy A Short Sale Property

Gina Pogol
The Mortgage Reports contributor

Why Would You Buy A Short Sale?

If you’re looking for instant home equity, that is, a house that’s worth more than you pay, so-called “distress sales” can be tempting. Who doesn’t want something for nothing? But just because you buy a short sale property doesn’t mean you’re automatically getting a great deal.

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How Much Can You Save With A Short Sale?

According to the National Association of Realtors (NAR), short sales were discounted about ten percent in 2016. So if you’re willing to jump through the hoops and make it happen, you’re likely to be rewarded.

Unfortunately, that instant equity doesn’t count toward your down payment. Almost all lenders finance homes based on the lesser of the sales price or appraised value.

However, this does mean you’ll probably be able to drop or reduce your mortgage insurance coverage in a year or so either by refinancing or paying for an appraisal and requesting termination of your coverage. If you plan to get a new appraisal to drop MI, see if a lender accepts them before choosin g it to finance your purchase.

How Much Should You Pay For A Short Sale Property?

Short sale property valuation is tricky. You don’t just take the asking price, subtract ten percent and, voila! Achieve an instant bargain.

While the home seller technically sets the price, the seller’s lender must approve any offers. It’s the lender, after all, that’s going to lose money on this deal.

Lenders don’t typically pay for appraisals for short sale properties. They usually order cheaper Broker Price Opinions, or BPOs. The valuation is much more likely to be inaccurate than an actual appraisal. If it’s low, good for you. But if it’s high, your short sale is not bargain.

Then, there’s the list price. Some lenders approve a list price that’s higher than the BPO value, because they want to minimize their losses, and they hope someone is willing to pay more.

Some set the price at exactly what they are willing to accept. And others list property at prices far below what they will actually accept in hopes of starting a bidding war.

Get Your Own BPO

To decide of a home is a good deal, you need better information than the lender has. That’s not usually hard to get.

Make sure your agent specializes in the neighborhood. Ask him or her to prepare a BPO on the house. You are likely to get a more accurate estimate than a high-volume broker who doesn’t know the area — and who is being paid a pittance by a bank.

Verify your new rate (Nov 13th, 2019)

How To Make An Offer When You Buy A Short Sale

Short sale sellers and lenders may not review your offer until they have several to compare. So you want yours to be the one they accept. Here’s what you need to do to get your nose in front of the competition.

Be willing to wait

Let the seller know that you expect the process to take a while and that you are willing to wait.  While short sales can happen as quickly as “normal” sales, 90 to 120 days for completion is not uncommon.

If you require an acceptance within 30 days, your offer probably won’t be considered. Give them at least 90 days to make a decision.

Keep it clean

This is not the time to ask the seller to cover traditional buyer closing costs, repairs or home warranties. In fact, if you offer listing price and want to make sure you beat out anyone else with the same offer, cover one of the costs traditionally paid by the seller.

Put your down payment into escrow

Novice buyers make earnest money deposits of $1,000 or so. and think they are being impressive. They are not.

Because your earnest money gets credited toward your down payment, there’s no reason not to put your down payment into escrow as earnest money. It shows that you’re serious about closing and able to do so.

It also makes it easier for the lender to source your down payment when you’re ready to close, because it’s been sitting in escrow for months.

Get mortgage pre-approval, not pre-qualification

A mortgage pre-approval, also called credit approval, means that you have applied for a mortgage, supplied documentation, and been approved by an underwriter.

It tells the seller and lender that as long as the property meets your lender’s guidelines, you can complete the purchase. In contrast, a pre-qualification letter indicates only that you “should” be able to qualify for financing, based on information supplied by you.

Which do you think is stronger?

What Are Today’s Mortgage Rates?

Today’s mortgage rates depend on your plans for the instant equity in your short sale purchase. if you expect to refinance in a year and drop mortgage insurance, or if you plan to flip your short sale home, choose a loan with a shorter fixed-rate period.

Rates for 3/1 ARMs, for instance, are running about one percent lower than those of 30-year fixed home loans.

Verify your new rate (Nov 13th, 2019)