Buying a Short Sale
Are you looking to buy a new home? Are you thinking that now’s a great time to find bargains? You might be right, but it pays to know a little about the seller’s situation before you make an offer.
What is a short sale? A short sale occurs when the home is being sold below what the current seller owes on the property and the seller does not have other funds to make up the difference at closing. Many home owners find themselves in this situation for many reasons. They may have lost their job, become ill, or borrowed too much against it when lending standards were much lower.
A short sale is different from a foreclosure, often homeowners try to use a short sale to avoid foreclosure, but short sales mean potential pitfalls for buyers. Know the risks before you pursue a short-sale purchase.
You’re a Good Candidate for a Short-sale Purchase if:
You’re very patient. Even after you come to agreement with the seller to buy a short-sale property, the seller’s lender (or lenders, if there is more than one mortgage) must approve the sale before you can close. The response time is completely out of our control, no amount of calling and follow up can change that. You must expect no written communication from the lien holder except for the final approval. This has been known to take as little as 60 days or up to 1 year.
Your financing is in order. Lenders like cash offers. If you can’t pay all cash for a short-sale property, it’s important to show you are well qualified and your financing is set. Your offer will be viewed more favorably than that of a buyer whose financing is less secure if you have been preapproved, have a large down payment, and can close at any time.
You don’t have any contingencies. If you have a home to sell before you can close on the purchase of the short-sale property or you need to be in your new home by a certain time, a short sale may not be for you. Lenders prefer offers without any contingencies and flexible closing terms.
You do not get emotionally attached to houses. Many short sales take longer than expected. We can get all the way to the end and the contract could fall through due to lender/mortgage company terms being unacceptable, or we can’t close due to a foreclosure proceeding. You should be prepared for the contract to fall through. Less than a quarter of shorts sales are successfully closed.
You understand the price may not be accepted. The price is normally set by the Seller or their Realtor, not the Bank which holds the lien. Often aggressive pricing is presented on MLS, if it is not representative of the market value the bank could ignore or deny the short sale.
You are not fooled by lender approved short sales. If the MLS states “lender approved” this means that a previous buyer’s offer received approval at some point. That approval value may be old and not an accurate representation of today’s value. Even offering the previously approved price, or a price lower than that, could cause the process to start over regardless of a previous approval.
Risks when Considering a Short Sale
Have any offers been submitted to the bank for short sale approval?
Often an agent will leave the home status as active in the MLS after offers are submitted and continue to collect offers. There is no way to know if that is the case. If you find a short sale and put an offer on it, we recommend you do not get attached to the house and keep looking. Offers on short sales are somewhat like playing darts, we will keep throwing hoping to hit a bulls-eye.
Has a BPO been done?
A Broker Price Opinion is like an appraisal. If this has not been done, the listing price you see could just be a teaser price. Please take this seriously, you may find a home that looks like a great deal only to find out months later that the bank won’t honor that price. Typically, if the BPO has not been completed before we make an offer we would do a market analysis. We then subtract 10%-15% to determine the lowest price that the bank is likely to take in a best-case scenario. Keep in mind that BPO values are occasionally inflated.
Number of Liens:
If there is more than one lien on the home, the short sale becomes more complicated. You must get all the lien holders to agree to the short payoffs. Often one lien holder will deny the short sale which will stop any other lien holders from being able to move forward. Avoid these situations if at all possible.
Who are the lender(s)?
Some lenders are better at handling short sales than others. Honestly, there is not much indication if it will go smoothly (3-4 months) or be a nightmare (9-10 months). We still like to know who we are dealing with.
Sellers Hardship:
Will the seller qualify for the short sale? Sellers may request a short sale, but if there is not a documentable hardship, it is likely the bank will not approve.
Status of Foreclosure:
Is there a Lis Pendens filing? Even with a short sale in process, the bank has the legal right to continue with foreclosure proceedings if the foreclosure is final before the short sale closes everything stops.
We don’t want to scare you about short sales, but we want to let you know about the challenges, hassles, etc. to set proper expectations. The last thing we want is for you to be surprised when months from now we find out another offer beat us out, or the price in the MLS was a teaser and the bank won’t accept it. It is an emotionally draining process for clients we have helped with these type homes. Many clients, after months of looking and trying, give up and end up buying a seller owned or foreclosure after all. Most buyers don’t want to wait 4-10 months to get their home. After being the seller’s representative on these homes, I know what it is like to deal with the bank and take offers from buyers who drop out or have the second lien holder kill the deal. Please beware.
