Mortgage 101 – Part 2: Navigating the Purchase of a Short Sale Property

We covered the basics of short sale properties in Part 1: Mortgage 101 - The Short Sale, but now we're going to get into the actual process of buying one. It's a much more complicated process than buying a non-distressed property. In fact, it may be that it's less about strategy and more about mistake avoidance!

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Recapping the Drawbacks of Buying a Short Sale Property

In Part 1 we listed those drawbacks, but let's summarize them here:

• The price may not be a real bargain
• You're not really dealing with the property owner - every detail must be approved by the current lender
• You must accept the property in "as is" condition - no repairs will be made either by the seller or the lender
• The process can drag on and on...and on
• The lender may continue soliciting offers while yours is pending
• Two lenders are NOT better than one - there may be a first mortgage and second mortgage on the property, and the sale will need to be approved by both
• You may have difficulty getting financing, should your lender require property repairs

Rather than rehash this one by one, we're going to address dealing with each in the following sections, though not in the order listed above.

Know the Local Real Estate Market

Drawback # 1 above refers to the most critical component of purchasing a short sale, and that's knowing the real value of the property. The only way to do that to get to know the local real estate market.

To do that, you can go on sites such as Realtor.com and Zillow.com. That will help you to learn the basic property values in the immediate neighborhood. Neither site will provide you with closed sale prices (OK, Zillow.com will, but well after the fact), but they will give you an idea as to what asking prices in the area are. The short sale you're interested in should be priced well below this.

But you still need to get access to close sales in the neighborhood. These are referred to as comparables, and they are the best barometer of the true value of the property.

You'll have to get help with this one, which flows nicely into the next tip.

(If you have any doubts about the value of the property, you may be well advised to pay the $300 to $400 to have it formally appraised by a licensed appraiser. You don’t want to risk paying too much for a short sale property.)

The Importance of Working With the Right Real Estate Agent

If you're going to buy a short sale property, you're going to need help. A good real estate agent can provide that help. At a minimum, the agent should be able to provide you the aforementioned closed sale comparables. That will help you to establish reasonable value of the property.

But you also want to work specifically with an agent who has previous experience working with short sales. It's a very specialized market, and an agent who has never worked with such properties can't possibly help you.

Look for an agent who has previous experience with short sales, and can provide evidence to prove it. An experienced agent will be worth his or her weight in gold with this type of transaction.

Do an "FBI Number" on the Property

A short sale is not a foreclosure, but it can have similar problems. One of which is that legal information about the property may be scarce. The current owner may even be reluctant to provide too many details for fear that you will not go through with the transaction. For that reason, although the owner’s information is helpful, you should never rely on it completely.

At a minimum, you will want to order a title search on the property. This will let you know if there are any outstanding claims or liens against the property, including tax liens.

It will also help to address Drawback #6 - the double lender dilemma. The current owner may not want to disclose the existence of a second mortgage holder. This is because that would almost certainly kill the deal. And from your own perspective, it will probably be best to walk away from a property that also has a second mortgage on it. The title report will reveal the existence of such a loan, even if the owner doesn't.

You may also want to consider ordering a flood certification. This will let you know if the property is sitting in a known flood plain, which would then require you to get flood insurance. And again, this is a small fact that an owner may not reveal.

Normally title searches and flood certs are ordered during the closing phase. But you'll need to order both early in the process so that you'll know exactly what any issues might be.

Lender Cooperation is Absolutely Critical - But Not Always Forthcoming

This refers to Drawbacks 2 and 5 above. The ultimate counterparty in the transaction is the current mortgage lender, and they may continue soliciting offers even while you have one in.

This is a tough problem to overcome. The lender may have only lukewarm interest in a short sale to begin with. As a result, they may prove to be uncooperative.

It will help tremendously if either you or your real estate agent can open up a line of communication with the lender, rather than relying strictly on the owner for that connection. If you can find out who the decision-makers are with the lender, it may help you to avoid either wasting a lot of time or submitting offers that the lender will not accept.

Pay Close Attention to the Condition of the Property

In Drawback #3 we pointed out that you must accept the property in “as is” condition. But you should never rely primarily on your own visual inspection to assess what the condition of the property is. That can cause you to miss or even overlook significant deficiencies with the property.

The best strategy is to pay a licensed home inspector to investigate the property. The inspector will be looking primarily at structural damage, which is precisely the type of issues that you would be most likely to overlook.

Ask the inspector to check out the property thoroughly, and to document any issues. Once you receive the inspector's report never ignore its contents!

It's worth repeating that neither the owner nor the current lender is likely to perform any repairs at all. Any problems that are revealed by the home inspection will become your problem.

And your lenders.

Be Ready to Work Closely With Your Lender

In Drawback #7 we pointed out that you might have issues getting financing on a short sale property. This is primarily due to the condition of the property, and any repairs that may be required by your lender.

Your lender isn't going to nitpick here. They will mostly be concerned with structural damage or any issues that might cause a problem regarding either safety or livability. In other words, the big stuff.

But keeping in mind once again that the owner and the current lender won't make any repairs, could make it impossible for you to get financing on the property. This is another important reason why you need to order a home inspection. You never want to find out about major property issues late in the process.

Here's one last critical piece of advice regarding repairs: Don't invest any of your own time or money making repairs. If your attempt to purchase the property is unsuccessful, you will not be able to get your money back.

Develop the "Patience of a Saint"

Finally, let's address Drawback #4, the time factor. You should only consider buying a short sale property if time is not an issue. If you need to get into a property within 30 to 60 days, then a short sale will not work. The process of purchasing a short sale property can drag on for months. You will need to be completely flexible in this regard.

You'll also have to save some of that patience to deal with the current mortgage lender. They will be in no hurry, even if you make a reasonable offer. It might take them several weeks to consider that offer. They might then counter offer, which will add many more weeks to process.

If you have read everything in this article, and you're still not scared off, you may be ready to consider purchasing a short sale property. Just remember that there will be no guarantees, and you must always protect yourself on all fronts.