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The following article was written by one of our Blog readers to help other Buyers who are considering a Short Sale. This article can't be reproduced on any other website or blog without permission from the author. But, you can link to this page from your website or blog. If you'd like to contact the author, contact Keith.

Top Ten Secrets You Need To Know To Buy a Foreclosure Short Sale

Margaret Goddard

April 10, 2008 

There’s a lot of wacky stuff happening in real estate now – these are wild times for both buyers and sellers.  You’ve probably read or seen many news reports about falling prices and a plague of foreclosures creating opportunities for the crafty, wise buyer – now’s the time to get a deal on a foreclosure!  Buy a short sale and make a killing!!  It’s so easy, anyone can do it!

Um, Not!  I’ve just survived buying a short sale in foreclosure, and I’m writing this to let you know some important tidbits I really (really…..!) wish I had known before I started.  This article is written entirely from the perspective of a regular person who managed to buy a short sale despite many obstacles.  I’ll disclose up front that I am not a real estate expert, no sir, but I am also not a total idiot.   I’m a partial idiot who has learned a thing or two, and maybe I can speed up your learning process, and then you won’t feel compelled to write an article like this.  (Special note to real estate lawyers and other professionals:  This is opinion, from one home buyer to other home buyers.  I’m not trying to compete with you, and I’ll give you a shout-out at the end.)

To start, I’ll define some terms.  A “foreclosure” (for this article) is a house that is in the terrible process of getting ownership taken over by the bank.  The owner of the house is behind on the payments, and the bank (imagine a huge scaly dragon dozing on a pile of houses, who is hard to wake up, but very alarming once it notices you) is eying the house and filing legal notices etc, but doesn’t own the house yet.   A “short sale” happens when you persuade the dragon, err, bank, to accept less than the amount owed on the mortgage.  If you are the unfortunate owner of the house, you must give the bank a humiliating pile of paperwork that describes in exquisite detail how completely unable you are to live up to the terms of your obligations to them.   (Ah, it must be painful to do, however bad your decisions might have been.)    A short sale is not a vague term describing a quick dumping of the property – a short sale only occurs after the owner of the house has done a lot of work to convince the bank that it will be better off removing its liens sooner for a “short” amount, rather than letting the property be sold at auction later on.    My advice to you assumes that the seller of the house has already done that, and the bank has agreed in principle to a potential short sale.  (Buying a house that is already owned by the bank is a process I haven’t experienced – hey, don’t ask me.)

1.       Don’t do it.  Seriously

Gosh, if there’s one thing you remember from this, it should be:   Don’t do it.  Buying a short sale is such a difficult, complicated thing to do, and there’s so much that can go wrong – you should only attempt it if there is something really special about this particular house that you REALLY want.  If there’s another property you like that isn’t worth less than the mortgage, buy it instead.  Read on to find out why.

2.      A short sale is like negotiating a date – but with the person’s grumpy dad

 Normally, when you buy a house, you are dealing with a seller, through the middleman of your agent(s).  Once the buyer and seller agree on terms, you have a deal (and a date!).  In a short sale, you still have to reach an agreement with the seller, but the bank has to approve it before you have a deal.  It’s an unhappy threesome at best.  The bank has (use your Yoda voice here) Ultimate Power – and it doesn’t have any of the motivation for a happy outcome that you do.  The bank employees in charge of such matters work in a department called “Loss Mitigation” and their main job is to deal with defaulting borrowers.  They might sell the property if everything works out, but it’s not really what they’re there for.  They are bill collectors.  They are grumpy.  And they are in charge, just like Dad.

3.      The usual rules of negotiation do not apply

Are you expecting to make an offer, and perhaps receive a counter-offer, and maybe you will counter or accept that, and thusly arrive at a price?   You can just let that idea go.  In my experience, the bank never responded formally even once to any offer, and never countered (or authorized a counter).  The seller accepted every single offer I made (and, so what?!)  The only response I got from the bank was a Loss Mitigation person saying “We don’t like that price.  Try some other price.”  There was none of the usual process of arriving at a mutually acceptable price, and the bank certainly didn’t jump to take a low-ball price.   

4.      The usual rules of polite communication do not apply

 How can I say this diplomatically?  Perhaps I just can’t.  Saying that Loss Mitigation staff are grumpy is a wild understatement.  They were downright nasty (I imagine they were even worse to the seller) and from what I read online, my experience was not unusual.  Perhaps they’re overworked and overwhelmed, but I have never had someone speak to me so unprofessionally in a business transaction.  You (or your agent) just have to deal with it, and don’t respond to the rudeness – remember, they have Ultimate Power and can kill the deal just by refusing to call you back (with evidently no consequences).  To extend the questionable use of visual metaphor, picture this:  If the bank is a cranky smoldering immense dragon, you, the buyer, are a tiny little inconsequential gnat.  Dragons are not polite to gnats – they barely know they’re alive.  You’re better off if you don’t expect to be treated politely.

5.       The usual rules of real estate contracts do not apply

Are you expecting to make an offer that is good up through a certain date, and that offer will be accepted (or not) by that date?   Hahahahaha.  Dates mean nothing to the dragon, if it decides to approve your deal it will do so in its own sweet time, completely without concern for the dates in your contract.  The bank person in my deal told us she didn’t care what the dates in the contract were and wouldn’t even look at them.  It will probably take a painfully long time to put the deal together and get bank approval – the dragon moves at the speed of continental drift.  In our case, it took more than 3 months. 

6.      Your agent needs to be a hard working, persistent and irrationally cheerful person 

A short sale is more work for your agent, and they will have to deal with #2, #3, #4 and #5 above.  You have a much better chance of success if your agent is the type of person who is willing to jump through a lot of hoops for the cranky dragon.   

7.      Get a preliminary title report as soon as you’re serious about the house

Here’s the thing: once the bank determines what amount it will accept to release its lien on the property, it’s not going to accept any less.  But there are a couple of danger areas that could crop up during escrow that someone has to pay for – is it going to be you?  For example, the seller might owe a contractor money and there could be a mechanic’s lien against the house.  Seller can’t afford to pay it, the bank will snort at the idea, and that leaves….You.  The buyer.  Here’s another danger:  property taxes.  These must be paid off in escrow, and if they’re delinquent (it’s a pretty good bet that they are), someone’s got to pay it.  The way to get the bank to agree to adjust the payoff amount for those bills is to have your agent complete a very accurate HUD-1 form that lists all of those outstanding items.  If you miss something on the HUD-1, chances of getting the bank or the seller to cover it are not good at all.  The key to an accurate HUD-1 is the Preliminary Title Report – you need it much earlier in the process than you think you do.

8.      Get your financing lined up way in advance 

If, by some miracle, you arrive at a deal that the bank approves, your next surprise will be at the sudden acceleration of time.   None of this “I might get back to you next week” stuff!!  That’s what the dragon does, not you, Mr/Ms Buyer-Gnat!  The longest escrow you can expect will probably be 30 days, – during which you must complete all inspections, remove any other contingencies and get the loan funded.  It most likely won’t work unless you are already pre-approved for the loan.   Hop right to it!  In our case, the dragon gave us less than 3 weeks to complete escrow (after taking 3 months to approve the deal). 

9.      Understand what you’re really buying

You really must get the property inspected during the fleeting escrow, but not for the reasons you normally would.  The inspection is 1) to tell you whether the house has some terrible fatal flaw that will make you run away, and 2) to give you a nice long to-do list for when you own the house.  Anything you find in the inspection is very unlikely to get fixed by the seller – if the seller had money to spend on that kind of stuff, there wouldn’t be a short sale going on in the first place.  And the bank doesn’t care a bit about flaws in the house.  This sale is “as is”, baby. 

10.  Be prepared to let it go if things get rocky

Don’t get so invested in this particular property that you become desperate to keep the deal alive.  (Don’t let me hear that you ended up paying the delinquent $25K in property taxes yourself, because you couldn’t say goodbye!)   There are other properties to fall in love with, honestly.   If the deal crashes, it might actually be for the best.  Go ahead and let the place be sold at auction.  If it’s worth less than the mortgage, chances are good that no one will buy it at auction, and title will pass to the bank.  (bye, bye seller……)  In which case you might be able to start all over again, but this time with a different department of the bank, (usually REO  - “Real Estate Owned”) and their job is to sell the house (unlike Loss Mitigation).  The house will probably get listed with another real estate agent, who will deal with your agent in a more “normal” way.

Have I scared you away from buying a short sale?  That would be a good thing!  But if you’re determined to do it, I’ll tell the end of my story:  I did manage to accomplish it in the end.  I got a respectable deal on the house, but certainly not a major killing.  I like this particular house a lot, and so it was worth it in the end, but I really can’t recommend short sales as a way to get a special deal.  If you must do it, be sure you have an experienced real estate professional – I’m sure there are other pitfalls that I, partial idiot that I am, have failed to show you.