By Jennifer Srock
Don’t be discouraged from buying a short sale.
This is just information to consider when deciding on purchasing a short sale. Short sales are getting approved but you need to know what you may be getting into.
A short sale is a situation where a property seller needs to sell their home “short” of what they owe on their mortgage. It is an alternative to foreclosure where the mortgage company must agree to a reduce the payoff for the sale to proceed. The seller cannot make money on a short sale situation and if the short sale is approved by the bank, the seller is not obligated to accept the approval. Click the following link about why a short sale may not get approved.
Proceed with caution
If you’re a prospective buyer on a short sale property. If homeowners are letting their mortgage payments slide, does it make you wonder if they’re deferring maintenance such as taking care of plumbing leaks, the watering of the landscaping, changing air filters, etc… ? Or, if the homeowner still lives in the property, is there a better chance that they are maintaining the home?
Do not to expect repair opportunities or repair credits at closing.
A buyer can pay for inspections but it’s really for information only. Inspections and appraisal should be done once the seller accepts the offer which could be weeks before the bank accepts the offer. If the bank rejects the offer, the buyer is out the cost for inspections and the appraisal. If the bank accepts the offer, they may demand a closing sooner than the buyer’s able to complete all inspections. There’s no standard of practice so it’s best for the buyer to be proactive as if the offer is accepted.
The seller’s lender is not a party to but a contingency of your contract.
Their decision will affect the outcome of the transaction. The seller’s mortgage company will review the short sale proposal and closing the sale will depend on their response. The asking price is not always an accurate reflection of what the mortgage company will accept. Some short sales are advertised with low market asking prices as a strategy to entice bidding wars to drive up the price in hopes of having a chance of getting an acceptable offer to present the mortgage company. Remember, the seller doesn’t care what the house sells for because they aren’t going to get a penny of it.
Mortgage companies are not in the business of selling homes.
In the market of 2008, banks were forced into the real estate market, therefore, employees are being trained “in-house” as they go. Each bank has their guidelines for handling short sales. Many short sales fail because the mortgage company representative is unfamiliar with the local market and responds with an unrealistic proposal. The mortgage company is probably not located in the same city, or even state, of the short sale and are probably working on other short sales that are located in different markets nationwide as well.
Furthermore, many loans have PMI (Private Mortgage Insurance) that will cover a portion of the loss. So, the mortgage company’s motivation may be less since they’re covered regardless. You may have to start negotiating with the PMI company which will only add more time to the sale process and still won’t guarantee the sale. An escape provision should be added into your offer on a short sale property in case the process takes longer than you’re willing to hold out or if another property more suitable for your needs becomes available.
A bank has an indefinite time limit to approve the sale.
Once the bank gives their approval, they generally want to close ASAP. So, before the sale is even approved by the bank, the buyer will have to have had their inspections done, their appraisal done and their loan qualification taken to loan approval on the chance that the seller’s mortgage company approves the offer. Typically, the closing is less than a normal 30 day time frame. Sometimes as little as 2 weeks. So, you, your lender, your title company and your realtor better be prepared. Once the offer is accepted by the seller, the purchase process should begin on the chance that the bank will approve the purchase.
The mortgage company will seek any assets the homeowner may have. They may demand the brokers reduce their commissions as well. They may require the seller to sign a personal note to pay back the shortfall. Remember, the mortgage company wants to recover as much of the loan as possible. If the property goes to foreclosure it will simply get passed on for another department to deal with.
In some housing markets, short sales may not be the best deal.
When the market is declining and the lender is trying to get the most they can out of the sale, you may not succeed in getting a lower price than the current market value. You’re realtor can show you other similar homes for you to decide if the risks of buying a short sale is worth it to you.
Short sales are here to stay for awhile longer.
We’re expecting to see even more short sales as lenders become aware of the advantages of considering them over foreclosure. The banks cost on a foreclosure is significantly higher than on a short sale. The banks are not in the business of real estate so, it will take them time to come around. My office is already seeing a significant consideration of short sales from banks. Our Certified Distressed Property Expert (CDPE designated) listing agents have already seen banks put their short sale packages on top of the pile for approval just for their presentation alone. We’ve seen a successful time frame within 60 days to close as opposed to the 3 to 6 months it was taking. Certified agents under this CDPE designation are having an 82% success rate. There is hope for short sales. It’s up to you to determine if it’s worth the time and risk to you.