What you should know about purchasing a home offered as a short sale
Purchasing a new home is an exciting proposition, and with any luck, you’ll find the home that is just right for you and your family in record time. But what if your short list of possible “just rights” includes a home offered as a short sale?
A short sale listing may be ideal in every way, from being in the right neighborhood to having just the right space, bedrooms and features you’re looking for. It may be priced right and ooze curb appeal. In other words, perfect. And then your real estate agent says, “It’s a short sale. I don’t think we should bother looking at it.” Why?
Short sales can be complicated
A short sale listing occurs when a homeowner (seller) needs to sell but owes more on the mortgage than the house is worth and likely to sell for. The seller is working out the problem with their bank or mortgage company, and the bank has agreed to allow them to sell the house, instead of foreclosing.
It’s a complex process for the seller, but it also creates some additional issues for a buyer. While buying a short sale can take longer, knowing the issues and how to address them can greatly increase the chances of getting that perfect-for-you house, even if it is a short sale. Here are some things to understand if you are considering buying a short sale, with pointers on protecting your buyer position.
The bank makes the decisions
It will not matter if the seller loves you and your offer. The emotional part of a normal home purchase is no longer a factor. The seller has a partner – the bank is now the co-seller and will be calling the shots. The bank employs negotiators to handle offers and contracts according to a financial decision that has been calculated on the bank’s end to mitigate the bank’s loss. Only the bank knows the magic number. And they’re not saying. Yes, the home seller may accept your offer and sign a contract, but it is not a done deal until the bank accepts the contract and signs off, too. You, or your real estate agent, will not be able to call the bank and ask questions about a short sale listing.
Buying a short sale takes more time
The process is not as fast as a regular sale where contract negotiations may take only hours and closing can happen in 30 days. The entire short sale process from offer to close can take 90 to 120 days, if not longer. If you need to buy a home in a hurry, this is not for you. The bank may respond slowly when approving or rejecting the contract you’ve executed with the seller. The lender is working by committee or through channels. If other homes come into the market during that time and you find something else that you like even better, you’ll have to cancel your short sale contract before making an offer on another home and may risk losing your deposit. Buying a short sale requires patience.
Second mortgages or other liens can derail a short sale
If the home is secured by only one purchase money mortgage, the process will be more straightforward. But often, a seller in this situation has a second mortgage, home equity line of credit (commonly referred to as a HELOC), or other outstanding liens. A second mortgage holder will want a piece of the action to close out its claims on the house.
Before making an offer, ask the seller if there is more than one mortgage. Be aware that a seller in distress may not be completely truthful, or even know about other liens. It’s best to hire a reputable title company to run a title and lien search before making an offer on a short sale. Title searches are not expensive, typically in the $100 range, and can save you much time and disappointment.
Everyone thinks short sale means “a deal,” so there may be competing offers
The bank has done research, ordered broker price opinions, and arrived at what it believes is a fair market value for the property. The bank also operates under rules and regulations that will not allow it to take less than a certain amount of loss. In reality, the bank is looking to sell at as close to appraised value as possible. If it can realize more from a foreclosure than a short sale, it will do so.
Enlist the services of your real estate agent or other qualified professional to give you a realistic valuation of the subject market in general and the property specifically. Then make your offer accordingly. Do not be surprised if there are multiple offers and the bank responds, through the listing agent, by asking the top two or three buyers to resubmit a “highest and best” offer. One way to avoid this situation is to make a very solid offer in the first place.
A short sale is an “as-is” purchase with no seller concessions
If the seller had the cash and could simply pay the difference to the bank, there would be no short sale. For whatever reason (and that reason should be of no concern to you in your purchase negotiations), this is a distressed sale and there is no “squish.” You will not be able to ask the seller to come to the table with typical deal sweeteners such as a carpet allowance, home protection plan, repairs, or picking up some of your buyer costs. You will have to take the house as-is, subject to inspections. You will pay the costs of all inspections.
Make a solid offer that the bank has little or no reason to reject
If you really want to buy a short sale home, your offer must be solid and all paperwork complete. Try to lowball, or send in an offer without the correct addendums, and your offer will get kicked back. But not immediately. It may take weeks, depending on how many desks it must land on per the bank’s approval process. Your best bet is to construct a very clean offer per bank guidelines, which the listing agent should have.
Be sure to include proof of funds and a pre-approval from your lender, if a new mortgage is involved, so the negotiator knows you have the capacity to close. Finally, the offer should be at or over the asking price, if very recent sales comparables support it, and contain no contingency for sale of your existing home.
Tips for protecting yourself as a buyer in a short sale transaction
- When looking for a new home in a market where a short sale may be a possibility, work with a buyers’ agent who is knowledgeable and comfortable with the short sale process.
- Likewise, speak to a knowledgeable title agent (preferably an attorney) to determine issues that may affect a short sale transaction. A lien search will reveal if the home in question is in fact “buyable,” or if it has entered foreclosure proceedings.
- Ask if the seller’s lender has approved the seller as eligible for a short sale and has agreed to do a short sale before making an offer. Ask for proof. Some sellers and listing agents will advertise a property as a short sale due to the equity shortage only, without having obtained bank cooperation first.
- When writing an offer on a short sale, be sure to make the offer contingent on acceptable buyer inspections conducted within a reasonable period (less than 10 days). Also, include specific response and closing times in the contract, so that your deposit can be released, and you can move on if those deadlines aren’t met. Allow for longer time frames than a conventional offer.
- Make sure everything is in writing! Keep good notes on all phone conversations regarding the sale and purchase negotiations.
For more real estate short sale tips and information, talk to the professionals at All Property Title and Escrow in Coral Springs. We’re here to help guide you through the closing process for short sales or conventional transactions!