Short Sales – What a Buyer needs to Know
It's understandable. More and more homes are coming on the market at lower and lower prices. If you're a prospective home buyer, that's a good thing, right? A lower price simply means the property is that much more affordable. And we love that!
Foreclosures have pretty much taught us that price isn't everything, though. When you're actively looking for a home, one thing you're likely to discover is that foreclosures are often distressed properties. And I mean REALLY distressed. While that's not always the case, truth is the odds are pretty high that if you're looking at foreclosures, you're finding that the vast majority of them need a lot of work. You're likely to find things like holes in the walls, missing fixtures, missing wires, missing plumbing (that copper has value!), and general vandalism. As a matter of fact, some of that vandalism was done by the previous owner, frustrated and angry at having lost his home to the bank. The price isn't the price when it means you have to invest a whole lot of money into the property to be able to live in it!
But Short Sales, as a rule, are different. With Short Sale properties, it's much more likely that it's the Seller who is distressed, not the property! Generally, while it's on the market as a short sale, the owner is still living in the house. The water is running, the heat is on, doors and windows get "normal' use. They still cut the grass, shovel the snow, and do the basic things that make living in a home comfortable.
The sad thing about a short sale is that the seller of the home doesn't actually have full authority to sell it...they must get an approval from their lender before they can sell. Unfortunately, their lender will not even discuss the possibility of accepting a short sale until the seller actually gets a contract on it. As a result, when a seller puts a home on the market as a short sale, they have to price it aggressively enough (low enough) that it will generate offers. It's not uncommon for a property to come on the market, and then be priced lower, and lower, and lower until it finally gets a contract.
Once there is a contract on the property, the seller must submit their contract (and lot's of others things as well) to their lender to help build a case as to why the bank should accept less than they owe on the property. The challenge is compounded even more if there is more than one loan involved (as would be the case if they had ever taken out an equity loan or and equity line, or a second mortgage). With the way home prices have escalated in recent years, that's very often the case. In other worded, the seller may have to get approval from not one, but rather two or three lenders!
Now here's the challenge: Lenders are typically taking one or two or three or MORE months to let the seller know whether or not they will permit the sale!!! In other words, when you negotiate your contract on a short sale, it may be months before you know whether you actually have a full agreement! Here are some things it's critical for you to understand:
- Even if you (and the seller) do absolutely everything you are supposed to do, there's no guarantee the seller's bank/s will approve the sale. Prepare yourself for a 50/50 chance you won't be able to buy the house (and those odds may well be optimistic!)
- If you need to close on a purchase by a certain date, a Short Sale represents a VERY high risk. There's no guarantee you'll be able to close at all, let alone by a specific date
- The interest rates will be moving up and down during the time you're waiting for a decision from the seller's bank. If they go up too high, you may no longer qualify to purchase the home. Remember, because there's no guarantee as to timeframe, your own lender won't be able to guarantee your interest rate.
- While you're waiting for a decision from the seller's bank as to whether or not you can actually purchase the house, other good buying opportunities may well be passing you by!
- Chances are your purchase will be "as is". The seller often does not have enough money to make is mortgage payments...he likely does not have any funds to do any repairs
In addition to those concerns, there are a few other things you'll want to consider:
- If you do write a contract, should you provide earnest money?
- What about making your formal loan application?
- And what about your home inspection?
While all these items are things you'll want to discuss with your own agent (and perhaps your attorney), here are some things you'll want to consider:
- Providing earnest money means those funds are not readily available should you get frustrated by the wait and want to make an offer on a more readily available property
- NOT providing earnest money signals the seller you may not be negotiating "in good faith"
- Making your formal loan application with your lender means paying for an appraisal on a property you may not actually be able to buy
- NOT applying means that IF the sale is approved you may really be scrambling to get it closed within a certain timeframe (when the seller's bank does approve a sale, they want it closed YESTERDAY...even though they were the ones that held up the process in the first place!)
- Having a home inspection done means you're investing time and money on the due diligence on a property you may not actually be able to buy
- NOT doing the home inspection in the beginning means that you've waited all that time on a property you might not have even wanted to buy, had you known the issues a home inspection would have exposed
Bottom line...a short sale may actually be a great option for you. However, the great value that property might represent does come at a price! That price? High risk...low peace of mind!