real estate

How to navigate a short sale

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.

Know what you are getting into. Under the best circumstances, short sales take a long time to close and may require extra effort on the part of the buyer. Walking blindly into a short sale can be a losing and distressing proposition, so push for disclosure before you get involved, Thompson says.

This is not a do-it-yourself project. 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. "You certainly don't want someone who is a shrinking violet."

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. This "counselor" probably won't make the deal go any more smoothly for you and certainly won't do you any favors pricewise.

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Be wary of the condition of the property. If the seller is in financial distress, chances are the home may not be well-preserved. The seller also may be reluctant to reveal serious maintenance issues. Proceed cautiously and get the property inspected by a knowledgeable person before you commit.

Make sure the deal has a prayer of closing

If you've decided to go for it, the first step is to have your real estate agent talk to the real estate agent representing the seller and determine the status of the short sale. Below are items that most lenders require from a short seller. If the seller is unable or unwilling to provide this information, the short sale won't close and any buyer is wasting his or her time. Your real estate agent should push for candor from the seller's agent.

  • 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. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that's the case, this deal is unlikely to close.
  • 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. This packet of information is similar to what's known as a Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller's contention that the property is worth no more than the short-sale price.

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