What you should know about the Short Sale Buying Process
When shopping for a home, you may notice that certain listings are labeled as Short Sale. This term mean: the seller is upside-down on his or her mortgage and is attempting to negotiate a deal with the lender in the hope of avoiding foreclosure.
In this type of sale, the Bank (lender) agrees to accept less than the amount owed on the Mortgage. The transaction benefits the bank by allowing it to avoid repossessing the home in foreclosure, which is expensive and time-consuming, and it Benefits the seller by allowing him or her to avoid the negative credit ramifications of foreclosure (and the bankruptcy that sometimes accompanies it). If you're interested in buying a property that's listed as a short sale, here's what you need to know.
How It Works
Unlike in a foreclosure, the bank does not own the property in a short sale. However, because the bank must approve the sale (because it is the lender, not the seller, who will be taking a loss on the property) it will seem like the buyer is purchasing the property from the bank. Short sale transactions, however, can be much more time-consuming and patience-testing than foreclosure transactions.
In some ways, buying a short-sale property is just like a traditional purchase. However, there are a couple of ways in which the purchase agreement you and your Realtor ®draw up are different. The contract will specify that the terms are subject to the mortgage lender's approval. In a normal transaction, the only party who would need to approve the sale is the seller.
The contract should also state that the property is being purchased "as-is". While it is acceptable to include language in the contract that allows you to back out of the deal if an inspection reveals any problems, in general, you should not expect the bank to lower the price to account for repairs if any problems are revealed. The bank is also unlikely to make any repairs, and the seller, being strapped for cash, is probably even less likely to help out. Given the situation, you'll likely also need to have enough money for repairs and closing costs.
A Waiting Game
If you make an offer on a short sale property, be prepared to wait. Banks are notorious for taking as long a month to respond to short sale offers. Short sale may not be worth it from your perspective if you can't handle the stress of waiting months for the entire process.
Weighing the Pros and Cons
Experts disagree on whether short sales are a good deal for buyers. Some say that short sales are priced below market values, creating the opportunity for buyers to get a great deal or for first-time homebuyers to get into a home when they otherwise might not be able to afford one.
Banks have no interest in selling properties below market value and will do a comparable market analysis before setting or accepting a price for a short sale. Further, the listing price of a short sale may be an amount the seller's Realtor® thinks the bank might accept - rather than the amount the bank has actually agreed to accept. The bank might find the price too low, or the seller might list the property below market with the intention of generating a more offers. Many times the seller will be obligated to pay the bank back the difference between the mortgage amount and the sale price of the home, so it's in the seller's best interest to get as much money as possible for the home even though he or she will see no cash from the sale.
Better Living Conditions
One advantage to both the bank and the seller is that unlike a bank-owned property, a short sale property is less likely to be trashed or ransacked. The owner will still be living in the home and while the property may be suffering from deferred maintenance because of the seller's financial situation, the seller is not likely to destroy the place when he or she still lives in it. By contrast, homeowners who lose their properties to foreclosure often take out their frustration on the house as a way of getting back at the bank. If the property is damaged, the bank won't be able to get as much money when it resells the home.
Along the same lines, because short sale properties are still occupied, they won't have suffered at the hands of unscrupulous people who have chosen to squat in or vandalize the property. Vandalism can be a common problem with foreclosure properties, especially in lower-income neighborhoods.
Don't assume the property is a great deal just because it is a short sale, though. The bank is facing a losing transaction, so it will want to minimize its losses and sell the property as close to fair market value as possible. If you can buy a similarly priced property directly from the seller, do it. It will be easier than dealing with a short sale.
Precautions and Pitfalls
As you've probably gathered by now, short sale transactions are fraught with pitfalls and don't have many compensating advantages. If you still want to proceed in an attempt to snag a bargain or simply because the property that's perfect for you happens to be listed as a short sale, here are some precautions you should take and situations to be wary of.
Haggling Over Prices
Be prepared to raise your offering price. For the seller to increase the odds of the bank going through with the short sale, he or she may try to convince you to up your purchase price. Ultimately, though, the seller has no real authority to approve the selling price. The bank may also counteroffer as it tries to cut its losses.
On the other hand, the bank might not counteroffer. They might just reject your offer outright, especially if you've written a significantly lower priced offer. Or, in the worst case scenario, they might not reply for days, weeks or at all.
Bottom Line
Potential buyers of short-sale properties should proceed with a hefty dose of caution and a pound of patience. Even with a thorough understanding of the process, the best Realtor® in the world and a willingness to wait, the bank will not always cooperate. However, short sales can be a good deal for some buyers and more and more are closing successfully.
*Vicki Biehl does not provide any legal advice, counseling or representation to viewers of the site under any circumstances. We recommend checking with your personal tax accountant and your real estate attorney to answer your specific short sale housing needs. The information on this site is provided for information purposes only.
Smarter, Bolder, Faster and here to stay! Vicki & Randy Biehl – Century 21 Aztec & Associates
