Buying Short Sale Properties
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Whether you are looking for a new home or a real estate investment, short sale properties can be an attractive opportunity for home buyers. Its vital that you understand the pros and cons of this unique market to avoid potential pitfalls. You also need an experienced and knowledgable agent to guide you through the process.
Some questions you should have answered before making a decision to buy a short sale include:
- How many loans are there on the property, and can any be paid in full from the sale proceeds? Due to the easy lending guidelines that existed at the height of the real estate market, it’s not unusual for homeowners to have two or three mortgages on their home. If the proceeds of the sale fall short of paying all debt, there may need to be multiple bank negotiations. Often, the amounts that subordinate lenders can receive is determined by government guidelines, however, that does not obligate those subordinate lenders to approve the short sale. If there are multiple loans, it can add a good bit of time to the negotiation process, and it can also increase the chance the the short sale will not be approved under terms acceptable to the buyer and seller. However, it should be noted that many, many short sales involving more than one lender are successfully closed.
- Are there any other liens against the property or the sellers? All lien holders will need to approve the short sale if they are not being paid in full. Typically, lenders understand that tax liens will need to be paid out of their proceeds, but municipal liens, homeowners association fees or assessments, mechanics liens and personal debt usually are excluded. That means that they will need to be negotiated or paid by somebody at closing. There are ways to make this work, but you definitely need to know what you might be dealing with as early in the process as possible.
- Has a Sheriff Sale been scheduled? If the seller is far enough along in the foreclosure process, you might be racing to complete the short sale before the lender takes ownership of the property. If there is a valid sale contract being negotiated, the lender may postpone the sheriff sale.
- Has the list price been approved or has a valuation been done on the property? Knowing what the lender considers Fair Market Value of the property is incredibly helpful in getting your sale approved by the bank. Everybody wants a great deal, but the fact is that lenders will not accept significantly less than the AS-IS value (they will account for necessary repairs). Rule of thumb is that a sale price of 95-90% of the market value will be approved.
What should you expect when buying a short sale:
- The buyer’s lender is NOT a party to the contract. A contract to buy a short sale property is just like a regular sale contract. The difference is that the lender must approve the terms of the contract. While they may request changes the the terms agreed upon by the buyer and seller, neither party is obligated to accept those changes. However, if either party refuses to agree to the changes, the sale will not close.
- It will need to be an “Arms-Length” transaction. Lenders want to be sure that the buyer and seller are not related to each other, and that they are not business associates. If your brother is having a hard time paying his mortgage, you can’t bail him out by buying his house for less than he owes the bank (you can, however, pay up the loan for him). Many banks will also require that the parties are not related to their real estate agents as well.
- The lender will make you sign paperwork stipulating what you do with the property after closing. Generally they will require that the property is not re-sold for at least 90 days, and that there are no outside agreements between the buyer and seller. For example, you will not be allowed to rent the house back to the sellers or pay them additional funds outside of closing.
- Short sales can take 90 or more days to close. Although most banks are moving the process along faster than in the past, this is still a lengthy process. This can affect you in several ways: You need to have flexibility with when you can settle on your new property; You may not be able to lock in your mortgage rate; and the condition of the property may deteriorate during this time. Make sure you understand the timeline and are willing and able to commit to seeing the process through to the end.
- You may have to spend money before the sale is approved. Expect that you will still need to put up a good faith deposit (which can be sitting in escrow for a long time), you will need to pay for home inspections and possibly an appraisal. Doing these things can help ensure that your offer is accepted, however. An experienced agent will guide you on these issues.
- It may not work out. Despite everybody’s best efforts, there are sometimes issues with short sales that are beyond control. Sometimes you simply may not be able to get the property at terms that make sense to you, and sometimes the bank just won’t approve the sale. It happens.
A short sales can be a great opportunity to get a good deal on a wonderful property. They are not a good fit for everybody, and they are certainly more challenging than traditional home sales. For those that are willing to take a bit of a risk, the return can be excellent.
Do your homework and work with a knowledgable professional who thoroughly understands this unique market. We have the experience and expertise to guide you through this process.