Buyer Short Sale FAQ

Buying a short sale is very different from buying a resale or even a foreclosure. This list of Buyer Short Sale FAQs will provide you with invaluable information.

What is the difference between a foreclosure and a short sale?
A foreclosure is when the bank takes ownership of the property after the property owner has defaulted on the loan. The foreclosure process in Colorado can take months after the first mortgage payment is missed. A borrower is “short” when the borrower owes an amount on his property that when combined with closing costs and commission is higher than current market value. A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is “sold short.” Both foreclosure and short sale properties are sold “as is” which means the owner nor the bank are willing to make repairs and the buyer accepts this responsibility.

Why would a lender accept a short sale?
Buying a Short SaleIn a nutshell, money! The bank loses more on the property if they complete the foreclosure process than if they negotiate a short sale with the borrower. The foreclosure process is very costly to the lender when you include legal fees, property carrying fees such as maintenance and utilities, insurance, and taxes, not to mention lost opportunity costs when the bank’s money is tied up in the property. In other words, the bank’s money is tied up in ownership of the property when it could be generating interest from other qualified borrowers. Additionally, banks are in the finance business, not the property management business. Once the property is bank owned the market value declines even more. By negotiating a short sale with the borrower, they can save several thousands of dollars on each property, release their funds, and avoid ownership of the property.

Is it too late for a short sale if the lender has already started the foreclosure process?
Probably not, but it depends on the lender and where they are in the process and how flexible they are willing to be. A qualified real estate agent representing the buyer will work closely with the seller’s agent ensuring all the “blocks are checked” when an offer is submitted to the bank to improve the chances for approval in a timely manner.

Why do I need a buyer’s agent to purchase a short sale?
Working with a qualified buyer’s agent will help your chances of a acceptance of your offer. Working directly with the seller’s agent on a short sale, in my opinion, is a conflict of interest. The Seller’s agent needs to negotiate directly with the bank on behalf of the seller. If they are representing both sides of the deal, seller, and buyer, they are required by Colorado State to function as a transaction broker or neutral party. When an agent is negotiating a short sale with the bank, they need to be representing the seller’s best interest. As a transaction broker, they should be neutral throughout the transaction which means they can not advise either the seller or the buyer making it difficult for all parties to the transaction. The best solution is for each party to be represented by an agent.

Can I negotiate a short sale with the lender?
I have had many buyers who are anxious to call the bank and push the bank into a decision. Banks will not allow this. Only individuals authorized by the seller can negotiate with the lender on their behalf. In most cases, this is a qualified sellers agent and their representatives. Banks will not discuss a property with you unless your name is on an “authorization” by the seller. For starters, to get past the customer service representative you need the loan number and the social security number of the borrower. The property I am interested in has a second mortgage. How will that impact the seller’s ability to sell their property as a short sale? Lenders in second position understand the risks associated with being in that position. In most cases, the seller’s agent will negotiate with the lender in second position allowing the short sale to proceed with the first position lender. But be aware, with a second mortgage there are now two banks to negotiate with so the process could take even longer.

What should I look for in an agent to help me purchase a short sale?
You want an agent that understands the process and is not afraid to challenge the seller’s agent. Ideally, one that is certified to work with distressed properties. The Certified Distressed Property Expert or CDPE is a new certification that has recently exploded in the Colorado Springs market to help the growing number of sellers obtain relief from their mortgage payments. CDPE agents are trained to work closely with the lender on the seller’s behalf to help preserve the seller’s credit. When the buyer’s agent holds the designation, they understand the process and are not afraid to ask the tough questions. Nancy Murray of Murray & Associates of Keller Williams Colorado Springs is a CDPE real estate agent helping both sellers and buyers with short sales. Nancy is also certified as a Short Sale agent through the National Association of Realtors (NAR).

What does it mean when a property is bank owned?
The term bank owned comes into play when the foreclosure process is complete and the bank owns the property and is responsible for maintaining the property. Banks do not want to be property holders, that is why many bank-owned properties sell well below market value even after foreclosure. Unfortunately, many times during the foreclosure process, the homeowner takes out their frustration with the bank by damaging the property or just couldn’t maintain the property in the first place. So when we talk about bank-owned properties they are usually sold “as is” which can impact the ability of some buyers to make repairs or to obtain financing. Not everyone is a good candidate to purchase a bank owned property. Also, banks often do not agree to pay any seller concessions, such as closing costs.

How do I find short sales in Academy School District 20?
The best way to find distressed properties in Academy School District 20 is to work with an agent who understands the market and can provide the list of distressed properties as soon as they become available. Murray & Associates can assist you in receiving daily updates on distressed properties in Academy School District 20 or any neighborhood in Colorado Springs.

What is the process for purchasing a short sale in Colorado Springs?
The short sale process in Colorado Springs really is no different than anywhere else in the country. The first step is to hire a qualified buyer’s agent, preferably one certified in working with distressed properties (CDPE). The next step is to talk with a lender that can help you qualify for a loan and make sure you know what your upper limit is based on your debt ratio and income. It might be worth checking to see your current amount of debt before securing another loan you’ll have to repay. Check out this debt calculator for help with working out what you currently owe – Your real estate agent should be able to refer you to their preferred lenders. Once you know that you can qualify for a loan, your agent can start the search for you. We recommend starting with a custom property website that includes only the properties that meet your top criteria which can include all distressed properties in your price range and preferred neighborhoods such as Academy School District 20. Once you have identified your top picks, we can schedule showings just like any other property. Once you have selected your property we initiate discussions with the listing agent and put the offer together.

What happens after the offer is submitted to the seller?
Sometimes the seller knows what the bank’s bottom line is and will submit a counteroffer to the buyer. Once an agreement is reached between the buyer and seller, the offer is submitted to the bank as a short sale package with all the seller’s documentation for approval. Some seller’s agents will submit all offers to the bank; I would argue with the agent that they should submit the best offer that they receive by a certain date and all other offers should be accepted in backup position.

We found another property that we like better, can we get out of the contract with the seller?
Like any contract on a property, there are several times that the buyer can exit the agreement. If the bank has not accepted the offer, the buyers can exit the agreement by submitting a notice of cancellation. Additionally, after the bank approves the short sale, the buyer has the opportunity to inspect the property and exit the agreement by the inspection notice date based on the results of the inspection.

The bank is taking forever to approve the short sale. Who can call the bank and put pressure on them for approval?
Only the individuals authorized by the seller can contact the bank. Typically, this is the listing agent and their representative. The buyer’s agent does not have the authorization to contact the bank on behalf of the seller. This makes it very difficult for the buyer to just sit and wait. A good listing agent will provide weekly updates on the status of the negotiations with the bank.

Is there anything that the listing agent can do to move the process along?
Probably the number one thing the listing agent can do is to provide the bank all the information they request, in the format they want it, by the date they want it. If this requires involvement by the buyer, the buyer needs to be responsive.

The bank countered our offer. What now?
Is it a reasonable counter offer? If not, then your buyer’s agent should be able to justify a lower price with current market data. If it is reasonable, then your chances of acceptance is better. Countering the bank with a lower offer will delay the process. Remember that after bank approval, your lender still goes through their steps to approve your loan, including the appraisal. If the property doesn’t appraise for the agreed to price, then you have another opportunity to justify a lower price, but again, it will add time to the approval process.

I’m still interested. How do I write an offer on a Short Sale in Colorado Springs?

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By Nancy Murray

Murray & Associates, Keller Williams Colorado Springs