simple, conservative thoughts on money & finance.

I am no real estate mogul, but I just got a heck-of-a-deal on a house. And I think you can too!

My wife and I just bought our first home – a short sale. In the end, our purchase price was 15% below the market price of the home. That might not sound like a ton, but when talking about a home, it translates to 10’s of thousands of dollars. Today, I am going to explain how we did it, hopefully providing a template for others to follow.

Step #1: Know What A Short Sale Is

A short sale is one step shy of a foreclosure. To put it very simply, it is when a homeowner needs to sell their home, but the homes value is less than the amount borrowed against it. The homeowner is upside down, but they can’t weather the storm. They need out of their home and the subsequent mortgage.

From the homeowner’s perspective, they lower the price of the home until they get an offer on the property. In an act of desperation, they take that offer to the lender and ask for the lender to accept that offer as payment-in-full for the mortgage. Sometimes the lender will agree to forgive the deficit, but many times they do not. If they do not forgive the deficit, the homeowner is still liable for it.

From the buyer’s perspective, I provide the offer that enables the whole process to take place. I also get a good deal on the home, due to simple supply & demand principles.

Step #2: Find A Short Sale

By scouring the market, you will surely stumble upon a short sale situation. You could also find a real estate agent that follows the short sale / foreclosure market in your area. These agents will usually seek out investment opportunities for real estate investors. In this case, you would be the investor, but you would also be the resident.

Step #3: Move Quickly

We were the first people to view the home we ultimately purchased. However, by the time we drove home from the showing, someone else had already submitted a competing offer. We only lived 1 mile from the new property. Not only is that ridiculous, but it is also telling of how quickly you must act.

To equip yourself with the ability to move quickly without making any regretful decisions, do your homework. Know what you want from your home. Know what you can afford. Know what you want to spend. [Notice the difference between the last two points.] I am terribly slow at making big decisions. So I really needed to do my due diligence before I was ready to pull the trigger. With a short sale, I didn’t have much time to stew in my thoughts. So I am glad I had done my due diligence.

Step #4: Make a Strategic Offer

In a short sale situation, you will likely be up against competing offers. But the owner can only accept one offer to take to the lender. Once an offer is selected, other offers (even higher offers) can not be entertained. You need to be that one offer. But, you also want to get a good deal on the home. We accomplished this by using a little ‘strategery‘.

In order to be accepted over the other bidders, we offered more than the asking price. We also included larger-than-normal earnest money in our offer to suggest our seriousness, eagerness, and ability to make this deal happen. Our plan worked and our offer was accepted by the owner to take to the lender.

Additionally, we made our offer contingent on a home inspection. I have worked in the construction industry my whole life. So I had a very good idea of what the home inspection would uncover. I also had a contractor friend come and look at the home to verify my thoughts. After being selected as the exclusive offer on the property, I used the home inspectors report as leverage to reduce the price of my offer back down to the original asking price.

I could have lowered the price below the original price, but I did not necessarily want to. I made the assumption that the owner and lender worked together to establish that price. They knew their situation. I did not. Ultimately, I need the lender to accept my offer. If they did not, the owner could entertain other offers and I did not want to go there – for obvious reasons. I was extremely happy with that price. You know what they say – a bird in the hand is worth more than two in the bush.

By doing these crafty maneuvers, I was able to counter the competitive pressure of the other offers. I was able to have my offer accepted and not pay more than the list price. I was pleased.

Step #5: Wait

As expected, the owner accepted my revised price. After all, they just want out of the house. The owner then submitted my offer to the lender. The wait was on.

Step #6: Still Waiting

Two months later, still waiting. ‘They’ said buying a short sale was an extremely long process…and ‘they’ were right.

Step #7: Wait Some More

After 4 long months of waiting, we finally heard back from the lender. Our offer was accepted. Oh happy day.

Step #8: Celebrate…(Hopefully)

After this lengthy 5 month process, my wife & I were able to purchase our home for $30,000 dollars below market value. Well worth the wait. If you add that to the $8,000 dollar first time homebuyer tax credit, we saved a total of 20%. We couldn’t be happier with our first home purchase.

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