A successful Massachusetts short sale is not your typical transaction and requires patience, understanding of the process and the willingness to consult qualified professionals. There are additional legal and tax ramifications that apply to a short sale which may change the timeline for the negotiations and closing date. Homeowners that are in jeopardy of foreclosure may attempt to negotiate a short sale in order to preserve their credit and limit their future financial responsibilities. As a consumer evaluating Massachusetts short sales, you may find that a foreclosure or a “standard” listing is your best value.
The Massachusetts laws that govern the foreclosure process may provide incentives for the lender to consider a short sale with the homeowner. The process can take over 90 days and is an expensive legal process. The bankruptcy court allows sales to be overturned if the amount of the sale was less than the market value of the property. Therefore, lenders in Massachusetts go out of their way to notify prospective buyers and real estate agents of an upcoming sale. In 2010, the Treasury Department is offering lenders and homeowners additional incentives to consider short sales under the Home Affordable Alternatives Program (HAFA).
Negotiating a successful transaction requires an acceptable contract with the Seller subject to lender approval with no guarantees that the contract will be approved. In order to prevent foreclosure, the Seller is under a timeline to “sell short” and must have an offer that meets lender guidelines for lender approval. Follow these guidelines to improve your chances of a buying and closing on a short sale listing:
You must be a Qualified Buyer
As a potential home buyer you must provide evidence that you qualify to purchase the property. The lender will not approve a short sale with a home buyer unless they have reasonable assurances that they will have funding to consummate the contract. Obtain a credit approval from a reputable lender or if you are a cash buyer provide proof of funds through bank statements or letters of credit. The pre-approval must not contain restrictive conditions such as “subject to the sale of an existing property.”
The Listing – Do Your Homework
Sellers selling short typically have a limited amount of time to obtain a qualified buyer in order to avoid foreclosure. If they have not started the process by communicating with their lender(s) and providing the necessary paperwork, there may not be sufficient time to affect a sale. If you are working with a real estate agent, they can ask the listing agent as to the progress of the short sale package.
1. Is the seller’s short sale package ready for submission to the lender?
2. Are their junior lien-holders? If more than one, what are they? Is there a plan to satisfy all the lien-holders?
Do not pursue a property that is not “short sale ready” as you may be “locked in” for a long time and may not be able to buy other properties that come on the market.
Negotiating the Offer
The first step is to have the Seller accept your offer and in most cases you will be competing with multiple buyers. Some Sellers ask their real estate agents to market the property substantially below market value to entice a number of buyers. Others price the property at the low end of fair market value as the goal is to have the lender approve the selling price. Buyer qualifications, selling price and terms will be the deciding factors for Seller acceptance. Offers with fewer contingencies are usually preferred by Sellers and the lenders.
1. Earnest Money Deposit- Sellers will be hesitant to accept your offer with a low deposit as it is easy for a buyer to “walk away” from the contract.
2. Home Inspection – be prepared to invest the time and money in the home inspection prior to lender approval. A seller can’t take the risk of allowing the inspection after lender approval as they risk losing the buyer on the inspection issues and will not have time to sell the property to another buyer.
3. Closing Date Flexibility – lenders often require a “quick” closing once they approve the short sale. To take advantage of your contract you may be required to meet the lenders conditions. Also, be prepared to lock your interest rate thru closing so that your mortgage commitment will be valid.
Subsequent offers – In Massachusetts, real estate law requires that all offers be submitted to the Seller. A contract with a higher sales price may have a better chance at being approved by the lender and may be a financial advantage to the Seller. The lender will give the Seller direction as to submitting additional offers.
Lender Approval
Lenders will do their “due diligence” to substantiate the value of the property by obtaining one or more Broker Price Opinions (BPO). They have internal guidelines to determine an acceptable price for the property. In addition, Freddie Mac (one of the largest secondary market lenders) has a target sales price of 88% of “fair market value” established by the BPO(S).
Lenders have large inventories of distressed property so you must have realistic expectations of the time-frame for approval. It may take as long as 180 days and during this timeframe, property values can change. If the lender and the Seller are participating in the HAFA program, these timelines will be streamlined for a quicker response.
Fred Doleac, Broker/Owner for Virtual Homes Real Estate providing residential services for Massachusetts short sales and residential real estate services in Massachusetts, New Hamsphire, Rhode Island, Maine and CT. Relocation, home buying and selling services. Resources include MA Real Estate virtual community web sites, map based MLS search, foreclosure, short sales and bank owned homes.
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