What Buyers Should be Aware of In Purchasing a Short Sale

What is a SHORT PAY or SHORT SALE?

A SHORT PAY in real estate occurs when the outstanding monetary obligations (loans with recorded deeds of trust and liens) against a property are greater than market value or what amount the property can be sold for.

A SHORT SALE occurs when the owner needs to ask the bank or lender for forgiveness of some or all of the debt that is secured by the real estate.

How does that work? 

STEP 1:  Use the services of a qualified Realtor and broker.
 
Step 2:  Seller must verify the current monetary value of his or her property. If you are selling the property through a real estate broker, that broker will provide you with an estimate of market value.

STEP 3: Add up all the costs of selling the property.  If you are using a real estate broker, that broker will provide an estimate of closing costs. If you are selling the property on your own (for sale by owner), call a title insurance company or real estate attorney and ask, as a seller, what the closing costs will be.

STEP 4: Determine the monetary amount owed against the property. This will be the total of all loans against the property.

STEP 5:  Do the calculations. Subtract the total amount owing against the property from the estimated proceeds of the sale. On a short sale, this will be a negative number.

STEP 6: Contact the lender or lenders. Talk to someone responsible for the loan and tell them the situation. They will request a statement of hardship.  Talk to a supervisor or manager who will have more authority.

STEP 7: Ask the lender what its procedures are for a short sale. Some lenders are willing to work with you by reducing the amount owed or making other arrangements.  Get an agreement with the lender for reducing of loan balance to be paid off at closing.

STEP 8:  Sell the property.

Tips & Warnings:

Closing costs will include title and escrow fees (if the seller is responsible for any portion of them, which will depend on your county), attorney fees, a portion of unpaid property taxes, reconveyance fees, notary fees, delivery fees, documentary fees and/or transfer fees.

The amount on your monthly loan statement does not include interest. Interest is accrued until the date a loan is paid off, so you may have as much as 30 days of interest on top of the balance owing, and you'll need to include this interest in the total payoff amount.

If a property is sold under a SHORT SALE, the lender might require the buyer to make up the difference, either through a personal obligation or by collection.

The IRS sometimes gets involved with short sales.  The IRS could consider the short sale a relief of debt. In that situation, the amount of debt relieved might be treated as income to the seller. Check with your certified public accountant.
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BUYERS SHOULD KNOW & BE AWARE IN PURCHASING A SHORT SALE PROPERTY

Short Sales, REO's, bank owned properties, all sound like a way to purchase a property at a discount.  Here are 5 items to keep in mind if you are considering buying a Short Sale, REO or bank owned property.

1.  Your financing must be in place and ready to go to loan documents.

The short sale lender may take up to six weeks to approve a short sale request from the seller.  After approved, the lender gives escrow an approval letter stating the date on which they must receive the payoff.

2.  Most lenders in a short sale situation will not pay costs or fees on behalf of the buyer in a short sale.

This is important to consider when deciding on the type of loan and in securing loan approval.

3.  Insurance application for the property must be made and confirmed prior to purchase and closing.

This property could be vacant and or in less than perfect shape. The buyer should contact an insurance agent at the start of the transaction to make sure than the property is insurable.

4.  "AS IS" means "AS IS".

Read all of the up front disclosusre provided by the banker or owner.  If they are selling in AS IS condition, the bank or  owner is stating the the buyer takes thye property in current conditon at the time of contact acceptance.

5.  BUYER BEWARE.

Follow your Realtor's guidance and have all inspections allowed by the contract.  Read all inspection reports.  Find answers to each question before signing and approving inspections. Make sure that you know what you are purchasing.  Seek the advice of a Realtor.  If there are legal issues with the property, consult with qualified real estate counsel. Once the trsnsaction closes, the property is yours along with the problems.  Know and understand in advance what you are purchasing.

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Information provided here is applicable to private property purchases California. Whether or not this information is applicable in another state should be confirmed with a Realtor in your state and jurisdiction.

Harrison & Christi Long
Realtors and Advisors
Explore Properties Group, Coldwell Banker Previews
949-854-7747
Explore Real Estate

We are not here providing legal services or services of an accountant.  If a person wants or needs such professional services, he or she must contact and retain counsel or a qualified accountant.  There are risks associated with the acquisition and ownership of real estate.