There are so many things to consider when looking to make an offer on a property listed as a short sale. 

The biggest concern many buyers have is the delay and uncertainty associated with the short sale negotiation process.  Will the bank counter my offer?  How long will the process take?  Will I just sit around for six months just to have my offer rejected, thereby losing out on other deals and/or attractive interest rates?  How can I trust what I’m being told by my agent, the seller’s agent and/or the short sale bank?

Furthermore, many people believe they are entitled to a deep discount on a short sale, either because the property is distressed or because of the time it takes for final approval.  After all, REO’s sell for a perceived discount, and do not entail the wait time a short sale does.

The condition of the property is also important.  Essentially all lenders require an “as is” clause to be included as part of the contract.  This means that the buyer is purchasing the property with no representations as to condition or promises to make repairs from the seller.

6 Tips:

With all of that said, here are 6 tips when considering buying or making an offer on a short sale:

1.     Be prepared to wait 3-4 months after making an offer, and possibly longer.  Banks are swamped, listing agents don’t know what they’re doing.  Accepting this reality up front will lead to less stress and frustration later.

2.     Employ the services of a short sale negotiator/attorney.  Insist that the attorney handle the negotiation with the lender by writing a corresponding provision into the contract.  This is for everyone’s benefit – the listing agent should welcome the suggestion to the extent it takes a load off their shoulders, the seller should appreciate the assistance of a professional negotiator or attorney, and, best of all, you the buyer get better representation with and greater access to the lender and the status of the approval.  This also ensures that the transaction complies with applicable state law.  Maryland, for example, has passed legislation that arguably makes it illegal for real estate agents to negotiate short sales. 

3.     Don’t expect a huge discount in value.  Banks are in the business of making money, and their loss mitigation departments know what they are doing.  The expectation of a killer deal isn’t feasible – we’re not saying it doesn’t happen, just that you shouldn’t expect it.

4.     Be flexible on terms.  Most lenders will not allow more than 3% closing cost concession.  Further, there may be monetary contributions the second lienholder or mortgage insurer impose on the seller – to the extent you can help with those, or at least be flexible in the structuring of the deal, it will facilitate the ultimate approval.

5.     Be sensitive to the seller’s situation.  This is a stressful time for most sellers.  They may be going through divorce, have lost a job, or even be considering bankruptcy with calls from collection agencies mounting daily. 

6.     Start low, work your way up.  Most listing agents appreciate full price offers on their listings, and fear tying up a property for months on end with a buyer who can’t or won’t close.  At the same time, you don’t want to have to pay any more for a property than you have to.  One solution to this tension is to offer a contract with a nominal starting price, but separately include a price escalation addendum that is signed by both buyer and seller to increase the price up to your ceiling offer.  When supported by a credible pre-approval letter, this can be a strong offer, which an intelligent listing agent and seller will recognize.

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