Steps to Buying a Short Sale

1) Identify Potential Short Sales

Locate pre-foreclosures in your area. You can use an online database, such as Zoolender.com, search courthouse listing, legal ads or by using an experienced real estate agent as a buyer's agent. First, try to determine how much is owed on the house in relation to its approximate value. If it seems high, it's a good candidate because it indicates the seller might have trouble selling it for enough to satisfy the loan. Pass on those in which the owner has a lot of equity in the home. The lender likely will prefer to foreclose and resell closer to the market price.

2) View the Property

Gauge its condition and come up with a rough estimate of how much it's going to take to repair or renovate. If it needs work, many "normal" buyers won't consider it, which is good for you.

3) Do Your Research

What is the property worth? What's the profit potential? If you're an investor or even a homeowner planning to live in the home a short time you'll want to profit from this deal.

4) Find all Liens and Mortgages

Ask the seller or his agent what liens are on the property, and which lender is the primary lien holder.

5) Figure out Financing

This is very important. You have to know how you're going to pay for the property. If you're a good credit risk, the existing lender may be willing to give you a loan. Since they already have a lot of your information in the short sale paperwork, they may be able to expedite the loan process. It's important to understand that in a short sale you have to have the ability to move quickly. Once an agreement is worked out, it is common for the lender to require a closing in as few as 20 days. This is too late to start shopping for a mortgage.

6) Contact the Lender

You or your agent should speak with the loss mitigation department(or perhaps the resources recovery department) rather than the collection or customer service department, which is only interested in recouping past due loan payment. Finding the decision maker can be one of the biggest initial challenges. You will first need to have the homeowner complete and sign (notarization is usually required) an authorization letter, which gives the lender permission to discuss the mortgage situation with you.

7) Complete the Lender's Short Sale Application, if They Have One

Many lenders have an application specifically for a short sale request.

8) Assemble the Proposal

The proposal generally consists of a package of materials including the application and authorization letter plus:

• The purchase and sale contract, signed by you and the seller, to buy the property for a specified price. The lender is not going to entertain "tentative" offers. In most cases this also means posting a sizable amount of money to demonstrate your desire and ability to go through the transaction if it is accepted.
• A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind behind on paymnets, usually 90 days or more. The lender must believe that taking a smaller loss now is better than a bigger loss later. To start, have the homeowner give an overview of their desperate situation, the lender must recognize the current and future inability to pay.
• A statement of the property's value. This can be an appraisal or a broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you. You want to convince the lender that the homeowner would not be able to get enough for the home through a normal sale to satisfy the loan. Compile a list of all the negatives and problems of the home that affect the value and make it undesireable to the average buyer and tougher for the lender to resale.
• Detail the costs and liabilites. You want to show the lender it would be much better off letting you take this property of their hands. If you can convince the lender the home is a money pit, all the better. Take photos of any damages and get estimate repair costs.
• A settlement statement. This statement (which can be prepared by a closing agent or real estate lawyer) outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often reffered to as a net sheet and the information can be entered into a HUD-1 Settlement Statement to show the final, negative result at closing.

9) Negotitate

It is not uncommon for a lender to reject your offer and come back with a counteroffer. As with any real estate transaction, you should figure out beforehand what your absolute highest limit is, and don't be afraid to walk away if the lender won't meet your figure.

10) Seal the Deal

Once you've reached an agreement that all three parties (you, the seller, and the lender) are Okay with, get everything in writing and officially recorded. Make sure the seller understands all of the terms of the deal. Next comes the closing and the property is yours.

More Important Details

1. The entire process gets far more complicated and uncertain of success if there is more than one lender invovled. Second or junior lenders often are the ones absorbing most of the loss. If there is a second mortgage or a home equity line of credit, you'll need approval from all of them. In addition, you may find your mortgage loan was sold to another entity in a process called "securitization," and therefore you also need approval from that company. Be sure to do a title research, and verify the lien position of the lender you plan to contact. Only pursue short sales with the primary lien holder.
2. The Mortgage Forgiveness Debt Relief Act of 2007 gave short sellers a big tax break by changing the way the forgiven amount was viewed for tax purposes. Prior to passage of the act, that amount was considered income for the borrower and was subject to tax. However, the new law removed that tax liability.
3. Time is of the essence. While you negotiate with the lender, the clock keeps ticking. Do everything you can to get the lender to move quickly. Many short sales fall apart because the lender moves to slowly and fails to complete the deal before the property goes to auction.
4. Some buyers have successfully negotiated with the lender to minimize the damage to the seller's credit rating. The lender has no oblligation to agree to this, but if you can convince them not to report this action as a black mark on the seller's record (and put it in writing as part of the deal) if will give the seller a big head start in rebuilding their financial lives. Typically, the loan will show up on a credit report as "paid," but it will carry a notation that says something like "settled for less than was originally owed." That is more favorable than a foreclosure, but still negative.