How to Do a Real Estate Short Sale

If you're in the market to buy a home, you've probably noticed some that are listed as short sales. When a homeowner is having trouble making mortgage payments because of an adjustable rate mortgage that has reset or because of a financial setback like job loss or divorce, they may be forced to sell the home even if it is worth less than the amount remaining on the mortgage. In order to avoid foreclosure and possibly bankruptcy, a homeowner may sell his or her property for less than the amount due on the mortgage with the bank's approval. The buyer of the property is a third party (not the bank), and all proceeds from the sale go to the lender.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Real estate agent
• Real estate attorney
• Mortgage pre-approval
• Earnest money
• Patience

1. Consider the benefits of buying a short-sale property. This type of transaction can be a great way to save money on a home for several reasons. First, it can allow you to purchase a property for less than what it is worth from a highly motivated seller, instantly increasing your equity in the home. Second, because of the extra hassle involved in short sales, you may have less competition with other homebuyers. Third, short-sale properties do not necessarily have deferred maintenance (unlike foreclosures) and are not necessarily in bad neighborhoods. Finally, particularly for buyers in expensive housing markets, purchasing a short-sale property may be the only way to get into the housing market.

2. Weigh the upside against the potential downside. All these benefits do not come without a few pitfalls. If you're planning to buy a short sale, look for one that is already lender-approved. Otherwise, you may get all your ducks in a row only to have the bank refuse the deal. Also, because the bank, not just the seller, must approve the offer, short sale transactions can take longer than the average home purchase transaction, so you probably shouldn't do a short sale if you're in a hurry to move. Don't expect help with closing costs, either, because the bank is already giving you a deal. Finally, because of the value created by buying a property for less than market rate, you may find yourself competing with experienced investors who also want the property.

3. Start looking. If you're still interested, the first step is to locate short-sale properties. If you have a real estate agent, he or she can find properties for you. You can also use a website such as Zip Realty to locate such properties.

4. Find out if the short sale is lender approved. After locating short-sale homes that meet your needs and wants, you or your agent should talk with the sellers to make sure the short sale is already lender-approved. Not all will be. If you have plenty of time to move or you are really interested in a particular property, you might consider proceeding anyway. Sometimes a bank will want to see that the owner has found a buyer willing to pay the short sale price before fully considering the sale. Because short sales are especially complicated for sellers, if you get the impression that the seller does not really understand the short sale process, don't waste your time.

5. Hire professional help. Because short sales can also be complex for buyers, you may want to discuss the transaction with a real estate attorney before proceeding. Also, make sure you have been pre-approved for a mortgage before moving on to the next step.

6. Complete the paperwork. Once you have settled on the short-sale property that best fits what you're looking for, you'll need to prepare a purchase offer. An agent and an attorney will be indispensable at this stage in helping you determine an offering price that the bank is likely to accept. To make your offer convincing, you'll want to submit a copy of your earnest money check and a copy of your loan pre-approval. As in any real estate transaction, prepare yourself for the possibility that the bank may not accept your offer unless you are willing to increase it.