Verify Buyer is Committed to Timeframe
One of the responsibilities of a listing real estate agent is to evaluate the strength of the offer. In a retail transaction, this would involve examining the financial details of the offer: the amount of the earnest money deposit, the amount of down payment, the credit score and potential for qualifying for the loan needed to finance the purchase. A secondary consideration may be the ability to close quickly, because the seller may have an immediate need for cash, or have a time related issue to deal with such as a job relocation.
In a short sale, the factors used to pre-qualify a buyer are very different. Assuming that a buyer is pre-qualified based solely on their financial qualifications is very common mistake made by real estate agents with short sale listings. A buyer, especially one with strong financial qualifications, has the ability to cancel the transaction if they have found another home while waiting for a short sale approval, or if they have found another home that does not require a short sale approval.
Therefore, it is necessary to widen the list of criteria that is used to evaluate a short sale. Of course, we can start with the price offered and the financial qualification of the buyer. However, we must ask additional questions to verify that the buyer is committed to working with us through the short sale approval process, and will be there at the very end to complete the transaction. Here are the pre-qualification questions in order of importance:
Patience ' "Are you willing to remain committed to this transaction until the lenders complete their short sale process, which may take up to x months?"
There are a few lenders who are able to issue a short sale approval in a matter of weeks, while there are many more lenders who can take between 3-6 months. It is very important to let prospective buyers know which lenders are involved, and the current timeline needed by each lender to process a short sale application. By disclosing this information to all prospective buyers, and asking for their commitment for the duration short sale evaluation period, you minimize the chances that a buyer will cancel the purchase contract before you receive an approval letter. This is the most important question you must ask.
Financial ' "Do you have a pre-approval letter to finance the transaction, or a bank statement demonstrating the ability to complete an all-cash purchase."
As a result of the foreclosure crisis, lenders have tightened their requirements for the issuance of new mortgages. Gone are the days of NINJA loans, which stood for No Income, No Job or Assets. One of the lessons learned is the newfound discipline in the evaluation of a buyer's credit worthiness, so to avoid having their future portfolios be filled with bad loans. Credit is more difficult to obtain, but there are plenty of credit worthy buyers in the marketplace, and many programs to encourage these buyers to apply for home mortgages. These buyers will be able to produce a pre-approval letter that demonstrates their ability to purchase the home. This letter is a required part of all short sale applications.
Purchase Price ' "Is the price too low?"
We must consider whether the price is too low. There many be many investors who will be making a "lowball" offer and acquire the property at a price that maximizes their future profit when they resell the property. With all offers, the lienholder will want to have justification that accepting the short sale is in their best interest. They will evaluate their net proceeds if they approve the short sale, against their net proceeds should they decide to foreclose. It is recommended that you supply the bank with your own market analysis data that supports the purchase price. The bank will also do their own evaluation of the property value by ordering a Broker's Price Opinion (BPO). Be sure to include market data that supports the purchase price of a short sale. If none are available, chances are high that the bank will reject the offer for being too low.
Price is the third most important factor. An offer that is less in price can be superior just because it has a buyer who is extremely patient and has a stronger financial profile. Do not assume that the highest price is also the one with the highest probability of closing.
Time to Close ' "Will you be able to close within 30 days of receiving all necessary approval letters?
An all cash buyer may have the upper hand in negotiating non-short sale transactions. They are able to close within days of signing the purchase contract, giving the seller some immediate cash. However, this advantage disappears in a short sale transaction because it will take more than a few days for a short sale application to get approved. What a lienholder will want to know is whether the buyer will be able to close within 30 days of receiving a short sale approval letter. They will want proof in the form of a pre-approval letter from the buyer's lender, or a bank or brokerage statement that documents the availability of cash to make the purchase.
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About the Author:
To learn more about how to qualify the best candidate for your short sale transaction visit whbsolutions.com. The number one factor in becoming successful in short sale classes, Short Sale Success and Short Sales is to learn how to pre-qualify your deal which includes finding the right buyer.