SHORT SALE PURCHASE FAQ SHEET

Disclaimer:  The following is a compilation of information on short sale transactions from Pinpoint Realty, LLC.  The information contained herein comes from our experience to date with short sales and through reading materials from the National Association of Realtors.  It is intended to inform you of key circumstances unique to purchasing a home that is being sold on a "short sale", subject to lender approval.  As a buyer, you must keep in mind that the sellers of a short sale are in some type of financial hardship.  This may be due to a job loss, job change, divorce, death, disability, or other negative force in their lives.  Therefore, the seller's lives are complicated and circumstances can change quickly.  Please be advised that a short sale transaction can fall apart at any time.  The decision to purchase a home on a short sale will require immense time and patience on your part.   If you do not have the necessary time or patience, purchasing a home on a short sale is not a good option for you.

Q:  What is a short sale?

A:  A short sale is when the net proceeds from the sale of a home are not enough to cover the sellers' mortgage obligations and closing costs.  Upon sale, the seller receives no proceeds.  This type of sale is sometimes called a "short equity" transaction, because the seller has negative equity in the home.  Because the seller’s lender(s) is taking a loss on the loan, the lender(s) need to approve the terms of the sale.

Q:  How do I know if the home I want to purchase is a "short sale"?

A:  In most cases this will be disclosed on the MLS in the agent remarks like this:  “subject to lender approval”, or “subject to 3^rd party approval”.  A listing agent does need a seller's permission to disclose a short sale transaction.  If you are suspecting that a home may be for sale subject to lender approval (i.e. a property has a seemingly very low list price), ask your realtor to speak with the listing agent.

Q:  How long does it take for a lender to approve a short sale?

A:  Approval times vary by lender and the volume of short sales that they have.  We have seen some short sales approved in as little as 3 weeks, and others that have taken as long as 4 months.  If there is more than one mortgage on the home (i.e. 2 lien holders), this can prolong the process.  TO PURCHASE A HOME ON A SHORT SALE YOU NEED TREMENDOUS TIME AND PATIENCE!  IF YOU DO NOT HAVE EITHER OF THESE, THEN PURCHASING A HOME ON A SHORT SALE IS NOT A GOOD OPTION FOR YOU.

Q:  Once a purchase agreement is submitted, what is the process to obtain the lender's approval?

A:  The listing agent will be in contact with the loss/mitigation department of the sellers lender(s).  The contact person at the lender is called a "negotiator".  If there are 2 or more mortgages on the home, there are 2 or more lenders, therefore, there will be 2 or more negotiators.  The listing agent will act as the liaison between all of the negotiators, and will help facilitate who gets how much of the net proceeds of any offer.  The listing agent should be able to provide your realtor with a weekly or bi-weekly update.

Q:  What will the lender do with my offer?

A:  They can do one of three things:  1) Reject it, 2) Accept it, or 3) Counter it.  Please note a lender can counter an offer HIGHER than the property’s list price.  The reason this happens is because the lender's opinion of the value of the property, based on a BPO (broker price opinion), came in higher than the list price.  When a listing agent is selling a home on a short sale, the list price is not determined in the same way as a traditional sale.  Typically, listing agents and their sellers will continue to reduce the list price on a home again and again, until they receive a purchase agreement.  Unless the listing agent has comparable sales to influence the BPO and to support the list price, it is possible that the lender will counter higher than list price.

Q:  Are the appliances, plumbing, electrical, and mechanical systems still "warranted" on a short sale?

A:  No.  The buyer will be purchasing the property "as-is".  Because the seller is already in financial distress, if something goes wrong with any of the appliances, mechanical, electrical, or plumbing systems, they will most likely NOT have the funds to cover the cost of any repair prior to closing. As well, the lender will not want to cover the cost of any repairs as they are already losing money.

Q:  Who signs the purchase agreement on a short sale?  Does the seller still own the home?

A:  In the state of MN, a seller has legal title and ownership of a home, and the right to sell it, up until 6 months AFTER a foreclosure (sheriff’s) sale occurs.  The 6 month time frame is called the "redemption period" - the time state law allows a homeowner to come current on their mortgage obligations before the bank can officially take possession of the home.  Sometimes the 6 month redemption period is reduced to 5 weeks if the home is "abandoned" (vacant, with no utilities, and not listed for sale).  As the legal owner, the seller signs the purchase agreement.  The purchase agreement will be contingent upon bank approval and the seller's acceptance of any terms the lender requires for their approval.  The lender will then issue an "approval" letter.  In most cases, the approval letter from the lender will be good for only 30 days (i.e. closing must occur within 30 days of lender approval).

Q:  What does the bank need from a seller to approve a short sale?

A:  The lender needs many documents from the seller in order to approve a short sale.  The documents, altogether, are called a "short sale package".  The documents include:  W-2's, pay stubs, bank statements, tax returns, a financial statement, and a hardship letter.  Because approval from a lender can take a long time, it is important that the listing agent have all of this information from their sellers as soon as possible.  As your realtor to talk with the listing agent to ensure they have all the required documents.  If they do not, a short sale transaction cannot occur, and you do not want to waste your time on that property.

Q:  If the lender approves the short sale, will the seller be responsible for any portion of the difference?

A:  Depending upon the difference between the seller's mortgage obligations and the net proceeds of your offer, the lender may attempt to pursue collecting debt from seller. THIS IS WHERE A SHORT SALE TRANSACTION CAN FALL APART!   The lender may ask the seller to sign a new promissory note for the difference.  They may also agree to the short sale payoff, release their lien so the property can be sold, but then sell the bad debt off to a collection agency.  The collection agency may then attempt to collect the debt from the seller.  We have no way of knowing what the lenders(s) may ask of the seller.  We must submit an offer and go through the process.  If the seller cannot or will not agree to the lender's terms of the short sale approval, the transaction cannot occur.   

Q: What else do I need to know about buying a home on a "short sale"?

A:  Keep in mind that the sellers of a short sale are in some type of financial hardship.  This may be due to a job loss, job change, divorce, death, disability, or other negative force in their lives.  Therefore, the seller's lives are complicated and circumstances can change quickly.  In a divorce situation, the listing agent may have difficulty getting Mr. Seller and Mrs. Seller to cooperate.  With death, disability, or job loss/changes, the seller may become frustrated and simply change their mind.  If this happens, all of the time you've spent waiting for the lender's approval will be lost. 

Please contact an experienced Pinpoint agent to discuss short sales further.  952.758.4040