What is Required to Buy a Short Sale Property?
As a multi decade real estate investor and portfolio manager I have never seen a lending and real estate environment such as this one. During 2005 and 2006 mortgages were plentiful as home ownership was touted as a necessity for all. Income, job longevity, and credit levels were of no concern for those desiring a mortgage. Sub-prime mortgages were plentiful.
As any rational individual would assume, if you don't have a steady income, large enough to handle increasing mortgage rates for an adjustable rate mortgage, you'll have a problem if the payment increases. What happens to the unqualified borrower when a job loss or emergency expense hits? Obviously, this borrower will be unable to pay the mortgage and eventually face foreclosure.
Multiply this scenario and you have a huge number of homeowners unable to pay their mortgages. By 2008 and 2009 homeowners delinquent on their mortgage payments reached double digit percentages of all mortgage holders.
The homeowners are faced with foreclosure, the lenders are faced with the inability to recover their investment, and the investors in mortgage backed securities are faced with declining values in their investments and possible defaults on the securities.
The housing market goes into decline as multitudes of homes are in foreclosure…… and as a bounce back to this scenario, lenders are terrified of lending for fear of loss, and new borrowers have difficulty obtaining a mortgage.
BUY A SHORT SALE?
Due to burgeoning delinquencies, many lenders grudgingly agreed to support a short sale, or sale of a property for less than the mortgage amount. It is a method for the lender to recoup some of their investment and the seller to get rid of the property.
I had the opportunity to purchase a short sale property in conjunction with a job change and cross country move. After previewing 10 properties, the four bedroom condo in a beautiful development was clearly the top contender. The short sale property was listed at a price of more than $100,000.00 less than the prior sale. Our full price offer was accepted.
WE WERE WARNED
The realtors and media informed us that purchasing a short sale property is a long, arduous journey, filled with unexpected delays, problems, and surprises. With my expertise, I was not afraid!
I asked the realtor and mortgage broker how the short sale process works, so I would be prepared to understand the transaction. Although I read quite a bit on the topic and received information from the affiliated professionals in the transaction, there was never a clear cut, step by step explanation of the start to finish process.
We signed the purchase contract in April.
At that point we provided preliminary financial information to expedite our loan process when the offer was accepted. We provided tax returns, W-2's, and copies of investment accounts. Our credit score was high with no debt outside of our current mortgage.
In the meantime, we received an offer on our existing home, and set the closing date at the end of June.
Including the cross country drive, we were ready to occupy our home mid-July.
After selling our existing home, our offer on the short sale HAD NOT YET BEEN ACCEPTED.
Obviously, we were not going to be in our new home in mid-July.
THE PROCESS CONTINUES ON AND ON
We made arrangements for temporary housing and off we went while our belongings went to storage in our new locale.
In early July, our short purchase offer was accepted. Just two and a half months later.
We were led to believe that the end was near.
The lenders requested about 50 pages of financial documents.
Our questions about the steps in the process received vague and unsatisfactory answers.
My analysis; There were hundreds of short sale transactions simultaneously being processed by a limited number of staff. No one wanted to make a mistake and have another unsatisfactory borrower, so they were going to ask for every single piece of financial documentation imaginable. This included a paper trail on every deposit into my checking account over $500.00. My contact explained the reason for this was to insure that our incoming funds were not from illicit activities.
By the end of July, our loan was approved. Unfortunately, it took two weeks to get the approval in writing.
We were lucky to be able to sign the settlement papers at our temporary location with the expectation that at the end of our cross country drive the sellers will have signed their documents and we could move in.
Even after signing the settlement documents, the lenders needed more financials. Oh, and by the way, there was an error in the down payment amount causing an additional wiring of funds.
We were getting closer.
We thought we had an occupancy date at the beginning of August. But the sellers weren't yet accepted for the short sale. How is this possible, when they listed their home as a short sale, with the bank's approval 4 months ago.
After over 100 pages of documents signed and sent, numerous delays and hurdles to leap, we finally obtained occupancy.
WHAT IS REQUIRED TO BUY A SHORT SALE
- Pristine credit
- Excellent financial resources
- Patience and no deadline for purchase
- Ability to handle multiple requests for obscure financial data
- Comfort with uncertainty and ambiguity
- Willingness to buy the property “as is”
Although still uncertain about the inner workings of the short sale process, ultimately, the purchaser gets a property at a fairly decent price. Yet, in any market, the financial gains will be determined over time.
Barbara Friedberg, MBA, MS is editor-in-chief of Barbara Friedberg Personal Finance.com where she writes to educate, inspire, and motivate for wealth in money and life. Learn about personal finance from a real life Portfolio Manager & MBA professor! Stop by the website and download a valuable free eBook, 20 Minute Guide to Investing.
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