By JENNIE PHIPPS
bankrate.com
This spring, real estate sales began picking up in many U.S. markets as buyers snatched up homes at depressed price levels. But not all sales have been proceeding smoothly. As a rule, sales involving foreclosures and short sales take longer than usual to close because of their inherent complexity.
Still, they represent a significant portion of sales activity. In February, these transactions made up 45 percent to 50 percent of all sales, sometimes more in parts of the country where the foreclosure rates were particularly high, according to the National Association of Realtors.
How can you get in on a good short-sale deal? It takes a certain amount of fortitude and patience, plus a lot of luck.
What is a short sale?
Selling a home for less than the amount the current owner owes the mortgage company is called a short sale. Buying a home that is a short sale is different from buying a property that is actually owned by the bank, known as an REO, or real-estate owned property, or a property that is in foreclosure.
A short sale can be a good deal for a buyer, and it can help the seller avoid having a full foreclosure on his or her credit record. Although a short sale and a foreclosure negatively affect a seller's credit score, in a short sale the damage can be minimized if the homeowner can persuade the lender to report the debt to credit bureaus as "paid in full."
In a short sale, the proceeds from the transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. For this deal to close, everyone who is owed money must agree to take less -- or possibly no money at all. That makes short sales complex transactions that move slowly and often fall through.
A recently announced extension of the government's housing rescue plan could make it easier to buy short-sale properties. The new version of the Making Home Affordable plan will pay lenders up to $1,000 if they allow a short sale of a property when the owners don't qualify for loan modification because they owe too much money on the home. The program will spell out a short-sale process and provide standard documents, the U.S. Treasury says.
Before you rush in, consider the issues. The advice below comes from Scott Thompson, senior vice president of Mortgage Resolution Services, a distressed sales consulting company, and Vicki Vidal, associate vice president of government affairs for the Mortgage Bankers Association.
Bid and wait
Under the best circumstances, short sales take a long time to close and may require extra effort on the part of the buyer, Thompson says.
Find a real estate professional who understands the territory. Having a real estate agent on your side who knows how short sales work and who has negotiated others will increase the chances of closing the deal.
"I would ask the agent to provide references, specifically on an REO or a property that was in short sale," Thompson says.
Thompson and Vidal advise staying away from "short-sale counselors," those who say they can jump in and expedite the deal. Their game often involves negotiating a low price with the lender, charging the buyer more money -- often significantly more money -- and pocketing the difference.
What the seller has to do
If you've decided to go for a short sale, here are some items that most lenders require from a short seller:
A hardship letter. The seller must explain why he or she cannot continue making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won't be approved, but a seller with cancer, no job and an empty bank account may.
Proof of income and assets. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. This package of information must include income tax and bank statements, going back at least two years.
Comparative market analysis. This document shows that the price of the property has declined and that the property won't sell anytime soon for the amount owed. This packet of information should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close.
A list of liens. There may be more than one, so determine how many liens are on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold.
The bottom line: Don't choose a short sale if you're in a hurry. "It's a waiting game," says Vidal.
Part of what slows down short sales is buyers' insistence on making really lowball offers, she says. "You get really crazy, ridiculously low offers -- and they are rejected."
