How to take advantage of a short sale

For sale sign against sky

If you're shopping for a home with a bargain-basement price, a short sale could be the answer.

This is where a lender allows borrowers who can't keep up with the mortgage payments to sell their home for less than they owe on the property.

The bank or mortgage company takes whatever you pay to purchase the home and forgives the remaining debt.

How low can you go and still expect a lender to approve the deal?

Lenders usually will accept offers that net at least 82% (after expenses) of the home's current fair market value, regardless of what the borrower owes, says Tim Harris, co-founder of Harris Real Estate University in Las Vegas.

Why would a lender do that?

Because it will lose less by allowing a short sale than by going through a foreclosure. For the buyer, it's less risky than buying a foreclosure, because so many repossessed homes need tens of thousands of dollars' worth of repairs.

The worst of the bunch have been deliberately vandalized by angry owners just before they were evicted. Here are 4 smart moves for buying a short sale property:

Smart move 1. Make sure you're a good candidate.

Short sales are all about presenting the lender with a deal it can't refuse. Banks and mortgage servicing companies are most likely to approve buyers that:  

Smart move 2. Hire a real estate agent who's experienced in short sales.

You need someone who can steer you away from properties if you're not likely to succeed. Vincent Bindi, a real estate broker for ShortSalesASAP in Orange County, Calif., says your real estate agent should interview the listing agent to determine whether the seller has done everything that's needed to win lender approval.

You need to know whether the home has been aggressively marketed -- the bank won't like it if the seller hasn't made a good-faith effort to get a reasonable bid -- and whether the bank has received a broker's price opinion, which it will use to determine the home's market value.

Smart move 3. Offer the right price.

This isn't the time or place to do a lot of dickering.

Lenders don't have the time or staff to evaluate an endless bunch of bids, each a little higher than the last.

If you deliberately lowball a bank or mortgage company, it will just write you off as a waste of time.

You need to come up with a cheap but reasonable offer, which the bank or mortgage company will accept, in one try.

Start by estimating the fair market value of the home for yourself, using comps (values of comparable properties that have sold near the home in the past few months).

Take the condition of the home into account and reduce your estimate if the home needs repairs. It's a buyer's market, and you don't have to treat a fixer-upper like it's in pristine condition.

Calculate 82% of the home's value, throw in a few thousand dollars to cover the lender's cost (ask your agent what that typically is for your area), and you have a good starting point.

Now look at the quality of your comps.

If they're straightforward deals, and the homes spent at least three or four months on the market, then you're good to go.

But if all of the comps are foreclosures that sold within a few weeks of hitting the market, you've got to assume those were damaged homes being dumped at fire sale prices.

You'll have to adjust your offer upward, perhaps all the way to the full fair market value calculated with those comps.

Check how close your offer is to the asking price on the home. Remember, the sellers won't get any of the money, so they have no incentive to demand an unreasonable price.

They're just trying to find a price you'll pay, and the bank will accept, to relieve them of their debt.

If you're close, then you've probably come to the same conclusions as the sellers and their real estate agent.

If not, then your agent needs to have another talk with their agent to find out why.

Smart move 4. Be patient.

It almost always takes longer to close a short sale, because it takes so long for lenders to review and accept your proposal.

We've heard of deals closing in as little as five weeks when the lender has preapproved the sale and asking price and you agree to meet that price.

But that rarely happens.

Most sellers don't seek the lender's approval until they have a signed purchase contract in hand. (Here's a step-by-step look at what sellers must do to complete a short sale.)

More often than not, it takes two to four months to get a "yes" or "no" from the bank or mortgage servicing company.

Although lenders say they're trying to process these requests more quickly, there still aren't enough loss mitigation specialists to deal with the rising demand for short sales, and we're not seeing a big improvement.

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