A lot has changed in the world of real estate over the last decade. As difficult as it may be to believe, the mortgage collapse was over ten years ago. A defining term that emerged shortly after the collapse was the “short sale”. There is a good chance that even if you were in real estate you probably never heard of it before 2008. In the years following, short sales were the driving force behind a majority of all total real estate transactions. While the overall number has greatly declined in recent years, there are still a good number of short sale transactions happening every day. But what is the short sale process and how does it work?
In this article, we’ll explore what a short sale is, how a short sale works, as well as the guidelines for successfully completing a short sale. With the help of 180 Homes, understanding the short sale process is simplified.
What is a Short Sale?
A short sale, commonly also known as a pre-foreclosure sale, is a transaction within the real estate industry refers to a sale that occurs when a financially struggling homeowners sells their property for less than the original amount due on the mortgage. Some homeowners will decide to complete a short sale of their fome if they’re in fear of a pending foreclosure which could plummet their credit score. A short sale will still potentially lower a person’s credit, but not as much as a foreclosure would.
The property buyer is a third-party entity and all proceeds from the sale go to the home’s original lender. The lender can then choose to either forgive the remaining balance or try to reach the selling homeowner for a deficiency judgement. A deficiency judgement requires the homeowner to settle the remaining balance. Some states will allow a short sale to forgive that difference.
How Does a Short Sale Work?
Prior to the short sale process beginning, the lender must sign off the decision to move forward with a short sale. The lender is required to document the justifications for the short sale to ensure they don’t lose money as the lending party. Due to the need to carefully track the short sale, they can be a lengthy process that can take up to a year to complete. A short sale is not a guaranteed tactic for negating a mortgage’s balance once the short sale is completed. While the original lied instated by the lender might be waived, the promise to repay the other parts of the mortgage can still be enforced. Since borrowers interested in completing a short sale need lender approval, they will quickly learn what needs to be settled.
Steps of the Short Sale Process
It is important to understand the short sale process before plunging into the steps required to successfully close the deal. Both as a homeowner and an investor, there is a lot of money and legal logistics involved in order to close. Here are the five basic steps associated with almost every short sale transaction.
One of the common themes when talking to homeowners in default is the speed in which it happens. Sure, it takes several months to get into foreclosure, but it isn’t an overnight decision. There is typically a financial hardship, medical emergency, or sudden reduction in income that sets the short sale process off. A few weeks late on the mortgage turns into a month and in the blink of an eye foreclosure papers are served. During the housing crisis, the glut of foreclosures caused lenders to come up with alternatives and many of those are still available.
Between loan modification or principal reduction, most lenders would much rather you stay in your home than go into foreclosure. The most common foreclosure alternative is a short sale. This is essentially the lender agreeing to accept less than the principal amount owed. For a homeowner the stain of a short sale is less than a foreclosure or bankruptcy. For a lender they can salvage something from a depreciating asset without having to add the property to their portfolio. Before anything can happen, the homeowner must accept their situation and decide to take some kind of action.
From a lenders perspective, the short sale process is very much the reverse of a traditional loan application. As much as a homeowner may want to short sale, the lender must approve it first. Once a homeowner decides on a short sale they need to show the lender that they legitimately can no longer make the regular payments. The lender will ask for several items to justify a hardship include paystubs, tax returns, bank statements and a hardship letter.
The lender is not going to just let a homeowner walk away from their property because they want to. You don’t necessarily need to be three or four months late on the mortgage to get short sale approved, but you do need to show that there is, or will be, a financial hardship. Once all items are submitted to the lender they will either accept the short sale application or reject it. If accepted they will move on to the property valuation part of the process.
As with any real estate transaction, the seller wants to walk away with as much money as possible. In a short sale the lender is willing to sell the property at a discount, but they will not just give the property away. To determine fair market value, they will either employ a local real estate agent for a brokers price opinion(BPO) or order an appraisal. Nothing will ever truly show a property’s value except listing it, but these methods will give the lender a good snapshot of what is going on.
If the property is not currently listed, the lender will recommend a price and if there is an offer already in place they will use this information to respond. As with any other listing, the more work needed and the weaker the market, the less leverage the seller has when completing a sale, regardless of it's a short sale or not.
Appraisals and BPO’s are largely subjective. While these estimations of value are not exact, they do play a part in the lenders’ perception of the property’s value and ultimately the price the lender is willing to sell the property for during the short sale process. Once the lender receives the report they calculate the bottom line at which they’re willing to sell the property and the negotiation begins.
As a seller pursuing a short sale, you can put yourself in a good negotiating position by partnering with a cash buyer and short sale negotiator who has experience negotiating distressed transactions. They can take lead on your behalf and leverage their strategies, tips, and tricks to put yourself in the best position possible. As far as timeline, short sale negotiation times have been greatly reduced but can still take several months under the right circumstance. If you pursue a short sale you need to accept, and embrace, negotiation.
Once the terms of the purchase are accepted, the closing for the short sale process looks very much like any other transaction. What makes things a bit trickier is the fact that you may need to get the homeowner out of the property. However, there may be monetary incentives from the lender or binding terms of a contract that favor the buyer. At the closing table the process is the same for a short sale, just a little more paperwork for the attorney. The bulk of the work is done once the lender accepts the asking price.
There are state specific rules for foreclosure and short sale that should be reviewed prior to moving forward. Regardless of what side of the transaction you are on, a short sale can be a viable alternative in the right situation. Makes sure to do the proper research and evaluate all options before turning to the short sale process.
Simplify Selling Your House with 180 Homes
When in a tough financial bind, it’s important to know all of your options. As a homeowner, a short sale might save you from a nasty foreclosure that could jeopardize your future living situation. Instead, enlist the help of experts to help you navigate the short sale process and lead you towards the right solution for you. 180 Homes provides cash as-is offers for homeowners looking to expedite the real estate process. Contact Us today to learn more!
A seller’s goal should be to find the highest offer with the strongest probability of closing. While a near asking price offer may look great after initial review, it may be full of unnecessary contingencies and red flags that may put you in a bad position as the seller. What if you knew what to look for at the beginning of your home-selling journey? What if you knew what questions to ask of an interested cash buyer that would prepare you with the necessary information to make the best decision possible?
In this article, 180 Homes explores some of the markers that you should keep in mind when working with a cash buyer on the sale of your home.
1) Strong Term Offers
A strong cash buyer should be offering to purchase the property “as-is” in its current condition with no expectations of the seller doing any work to the property before close of escrow. Contingency periods should not be unnecessarily long, and should fall in the range of 3 to 10 days depending on the complexity of any necessary due diligence. The earnest money deposit should be substantial and submitted to escrow within 72 hours of offer acceptance or sooner. While cash sales typically close quicker than traditional financed offers, there should be no rush from the buyer’s side to close escrow. In fact, there is a flexibility that should be expected of the buyer to close on the Seller’s timeline!
2) Access to Capital
One of the basic items investors should provide when submitting an offer is a proof of funds letter. This letter is typically from an attorney or lender that shows they have the funds available to to clear their offer amount and close escrow. However, you shouldn’t give this a quick once over and assume everything is ok. There are two important items you need to look at to confirm: the date of the proof of funds letter and where the funds are coming from. The date of the letter is important because, if it is months old, they may have depleted the account. A very outdated proof of funds letter may also suggest the investor is not telling you the full story and could be an indicator of things to come.
It’s also extremely important to note what kind of an account the funds are coming from. If the money isn’t in a liquid account such as a checking or savings account, there could be red tape and hurdles to access it. Without timely access to their funds, an investor may have to jump through hoops to bring funds to the table to close escrow which could risk pushing out the agreed upon close date.
3) Proven Track Record
Credibility may be one of the most important things to confirm in a potential buyer before accepting their offer. Doing so is easy if you know what questions to ask and where to look to confirm a buyer’s track record. Always ask for referrals and reach out to people they have worked with in the past for feedback on how their transaction went. Research the buyer online and dig into their testimonials and get a sense of what other people are saying about them. Look at their social media pages and the comments on their recent posts to see how they interact with their customers and followers. Ask the buyer for a list of active or past projects in your area to get a sense of how active they are and what their local experience is like.
Lack of timely response and bad communication can sour any relationship. This is even more amplified when the stakes are high you’re trying to selling your home in an efficient and stress-free way. Real estate transactions require a significant amount of back and forth, whether it be in regards to offer terms, paperwork questions, deal structuring, signatures, etc. If the buyer and/or their agent respond to a call or text within a reasonable amount of time or return contract changes in a timely fashion, something fishy may be looming. Be aware that there are buyers out there that don’t practice ethics and integrity that may just be spinning your wheels – bad communication can often be a tell-tale sign things are going in a negative direction
All cash offers are not created equal. Look out for both strengths in a cash buyer as well red flags investors include in their offers. Picking the right offer is important, but picking the right buyer can make all the difference in a quick, smooth transaction.
Work with an established buyer that can close! Get a Strong Cash Offer with 180 Homes!!
There are pros and cons to buying flipped houses. The main benefit is that you won’t have to manage any major renovations on your own. It’s the most convenient type of house to buy unless you’re going to buy a brand-new home—but then you’d be paying a lot more.
Of course, there are horror stories. You might have heard about homebuyers moving into a flipped home only to discover that the “renovation” was little more than cheaply applied makeup. A new carpet covers rotting floors, and shiny new kitchen cabinets are hiding clunky plumbing. The homebuyers realize that their “flipped house” is actually still a fixer-upper.
Believe it or not, there’s another way you can reap all the benefits of a flipped home, without any of the cons. Consider pre-purchasing a flipped home.
Why Should You Consider Pre-Purchasing
A Flipped House
A presale home is a property where you can start the home-buying process before it’s move-in ready. Many presale homes are houses that are still under construction. But you can also pre-purchase a home that’s in the process of being flipped.
There are (at least!) four major advantages to pre-purchasing a flipped home:
Let’s dive into each of these benefits.
1: Avoid Open-Market Competition
One of the most difficult aspects of buying a home is dealing with the competition that comes with the open market. There is a limited number of homes on the market with plenty of buyers ready to offer on a good opportunity.
While a house might initially fall within your budget, it could attract interest from several other buyers, and the price could escalate out of your range. A bidding war could ensue and drive an affordable home into unaffordable territory. Inexperienced homebuyers, in particular, mistakenly up their bid when they can’t afford it and wind up purchasing a house that’s far out of their budget. When they finally move into their new home, they’re “house poor”.
But when you pre-purchase a flipped home, you can avoid the open market altogether—so long as you know where to look for the opportunities!
Here at 180 Homes, for example, we manage our off-market inventory of properties that are going to be flipped or are in the process of being totally renovated. While under construction, these properties don’t have traditional listings. If you take the initiative to reach out about one of these off-market properties, then you could potentially secure yourself a deal on a new flipped home without any of the bidding-wars that you’re likely to face on the open market.
2: Contingencies and Protections
A common fear when buying a flipped home is that the home has not truly been flipped. You don’t want to put down six figures on a house only to discover that you paid $100,000 more than what it’s really worth. Inexperienced homebuyers can easily miss red flags that suggest a renovation was done poorly.
But when you pre-purchase a flipped home through an established company, you’ll have all sorts of protections that ensure you’ll be moving into exactly the place that you paid for.
When purchasing one of our presale homes, for example, you are afforded all the normal contingencies that you’d get with a standard home listing:
Virtually all the protections you’d get on a standard home purchase would be available to you when purchasing a presale home by 180 Homes. Furthermore, you can still buy the property using traditional financing, including FHA loans.
Typically, the transaction will begin while the home is still undergoing renovations, but your contingency period and escrow period may not begin until the renovation is complete.
3: Stronger Creative Influence
House flippers may know a thing or two about renovations, but they may not complete the home with the specific finishes you’d like to see. Although it’s nice to have renovation work completed for you, some buyers of flipped houses feel as though they missed an opportunity to give their new abode a personal touch.
When you pre-purchase a flipped home, you may get to have a stronger creative influence on the finished property as long as your chosen design features fit the overall budget and timeline of the renovation. Since you’re starting the transaction while the home is still being renovated, you may get to choose certain design features, like:
4: No Emotional Rollercoaster
Arguably the best thing about pre-purchasing a flipped home is that there’s no emotional rollercoaster.
It’s a tragic but all-too-common story: you fall in love with a home on the open market. You walk through the house and envision your family, your furniture, your future. The house falls within your budget, and you’re able to get the financing that you hoped for. You make an offer, and the seller seems interested…
…and then you’re informed that you’ve been outbid. Desperate, you make a counter-offer
…and it dissuades the other. You rejoice, thinking you’ve won the home…
…only to be informed that you’ve been outbid by a new buyer. And this time you can’t beat the price.
Home buying can be an emotional rollercoaster, especially if you’re a first-time homebuyer or if you’re trying to buy a home for your family. But it doesn’t have to be. As mentioned earlier, when you purchase an off-market home through a company like 180 Homes, you won’t have to compete with other buyers. Nor will you get excited about a new home, only to discover that it’s not the house you thought you were getting.
When you pre-purchase a flipped home, you’ll get exactly what you expected when it comes to home price and home quality. There’s no heartbreak involved.
There are significant advantages to pre-purchasing a flipped home. You can find a house in an off-market inventory and avoid the bidding wars that happen on the open market. You’ll have all the protections that come with a standard home listing, and you may even get to choose certain design features on the property. Plus, deciding to pre-purchase a flipped house can save you from the emotional rollercoaster of the traditional home buying process.
Contact 180 Homes to learn more!!
You can take two main routes when selling a home: listing the property or searching for cash buyers. In today’s fast-moving real estate market, sellers will likely have no trouble with either option. However, there are a few factors to consider before deciding which path to follow.
Cash buyers have become increasingly common in the last few years as more and more people have begun real estate investing. Working with a cash buyer can be tricky for sellers, as they may be unfamiliar with how the home selling process works. Many sellers fear that cash offers are too good to be true, but this is simply not the case. There are several situations where a cash buyer might make the most sense when selling your home.
In this article, 180 Homes explores the pros and cons of selling your home to Cash Buyers vs the pros and cons of selling your home by traditional listings.
Selling Direct To A Cash Buyer
Cash buyers are exactly what they sound like: buyers ready to purchase your home without a mortgage or long-term financing method. They typically buy properties to renovate or rent and are willing to move quickly to land deals. If you are curious about selling your home to a cash buyer, there are a few things you should consider first:
The most significant benefit of a cash offer is the potential for an overall easier transaction. Cash buyers are usually ready to place an offer on the home and close in a very short amount of time. They do not need to wait for a bank’s approval to sign the papers and finalize the purchase of the property. This can save sellers the stress of financing challenges that could delay the sale of the home. For these reasons, cash offers typically result in faster closing timelines. For example, here at 180 Homes, we average a ten-day closing period as opposed to the traditional 30-day closing.
Buyers paying cash will also typically forego a traditional home inspection or appraisal to make their offers more favorable. They are in the business of upgrading, renovating and doing work to add value to the properties they purchase. Many of them anticipate purchasing your home “AS-IS” in its present condition, meaning you’re expected to do absolutely no work to the home before closing.
An additional benefit: Cash buyers will often offer to pay for the Seller’s Closing costs and typically do NOT expect to be paid a commission as a result of the sale. These two benefits in combination can save sellers between five and eight percent of their net profits on average during the transaction. 5-8% is a chunk of change! Not only will selling your house to a cash buyer help save on closing costs and commissions, it will also help maintain your privacy and well-being during the sale. Many cash buyers will not request multiple viewings or extra photos of the property. You will not have to have a horde of people through your home! This privacy can be especially important as many individuals continue to minimize close contact with strangers as a result of COVID-19.
The number one tradeoff for a fast closing and simple transaction is the prices. Sellers will likely find that cash buyers tend to offer lower amounts than a traditional home-buyer would be able to. Many cash buyers are going to rehab or rent the property, and to make that profitable need to minimize their upfront costs. Unfortunately for sellers, this can result in an underwhelming offer. Sellers should also be prepared to handle any negotiations attached to the sale. Investors will typically gather information about the property and even request to speak with you one on one during the process. In a traditional real estate transaction, negotiations are handled by real estate agents. Try not to let this intimidate you! As long as you do the right research and background check the cash buyers you’re considering (google reviews are a great start!) you should not be concerned about the negotiations!
Listing A House For Sale
The most common way to sell a home is to work with a real estate agent and list the property for sale. By selecting the more familiar option, sellers can leave the heavy lifting up to a professional. That being said, there are still some factors to consider before listing a house for sale:
Exposure is one of the most important reasons sellers choose to list their homes with an agent’s help. A real estate agent will list your property and walk you through the marketing steps necessary to bring in offers. These include taking photos of the home, hosting open houses, and listing the property online. These tactics could open the door to multiple interested buyers and increasingly high offers. There is no guarantee that a bidding war will happen, but listing the property with the help of a qualified agent can boost your chances of selling the property for the price you want.
Listing a house for sale can also help you avoid some of the more challenging aspects of a typical transaction. You will not be responsible for reviewing contracts, negotiating offers, or even coordinating viewings of the home. An agent’s expertise can guide you through the home selling process, thus taking away some of the more stressful components associated with selling a home.
Listing a house does have its drawbacks, namely added costs in the form of agent commissions. Sellers are typically responsible for some, if not all, of the fees that help pay both the buyer and seller agents. These costs can range anywhere from five to seven percent of the closing price. Let’s say a property sells for $685,000 — the commission will be between $34,250 and $47,950. Sellers may also be responsible for additional closing costs that could further reduce the takeaway money from the sale.
Another thing to consider when listing a property is the potential for additional contingencies to be added to the sale that aren’t relevant when selling to a cash buyer.. Depending on the property appraisal and inspection, sellers could be responsible for making repairs before they move out of the house. Unfortunately, home inspections often reveal problems about a property that sellers may not even know about. This can invite buyers to request repairs or even de-rail the transaction before the buyers officially close on the property. Together, these factors could undermine the profits from the sale of the house.
Deciding to sell your home is a big decision to make, both emotionally and financially. Prepare yourself for the process by learning more about traditional listings vs. cash buyers. You may find that listing your home relieves some of the stress during this time; however, you may need the speed that only a cash buyer can provide. Each situation is going to be different, but take time to consider how either of the above routes could allow you to maximize your profits when selling your home.
It’s a great time to at least explore the option of selling a home for cash, but make sure you know what to expect. Contact 180 Homes to learn more about our Cash As-IS offer to expedite your real estate experience today!