Thinking of Making an Offer on a Short Sale? What You Need to Know.
Are you looking to buy a new home? Are you thinking that now's a
great time to find bargains? That's true, but it pays to know a
little about the seller's situation before you make an offer.
If a home is being sold for below what the current seller owes on
the property—and the seller does not have other funds to make up the
difference at closing—the sale is considered a short sale. Many more
home owners are finding themselves in this situation due to a number
of factors, including job losses, aggressive borrowing against their
home in the days of easy credit, and declining home values in a
slower real estate market.
A short sale is different from a foreclosure, which is when the
seller's lender has taken title of the home and is selling it
directly. Homeowners often try to accomplish a short sale in order
to avoid foreclosure. But a short sale holds many 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) has to approve the sale before you can close. When there
is only one mortgage, short-sale experts say lender approval
typically takes about two months. If there is more than one mortgage
with different lenders, it can take four months or longer for the
lenders to approve the sale.
·
Your financing is
in order.
Lenders like cash offers. But even 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. If you're preapproved, have a large down
payment, and can close at any time, your offer will be viewed more
favorably than that of a buyer whose financing is less secure.
·
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 like
no-contingency offers and flexible closing terms.
If you're serious about purchasing a short-sale property, it's
important for you to have expert assistance. Here are some people
you want to work with:
·
Experienced real
estate attorney.
Only about two out of five short sales are approved by lenders. But
a good real estate attorney who's knowledgeable about the short-sale
process will increase your chances getting an approved contract.
Also, if you want any provisions or very specialized language
written into the purchase contract, a real estate attorney is
essential throughout the negotiation.
·
A qualified real
estate professional.*
You may have a close friend or relative in real estate, but if that
person doesn’t know anything about short sales, working with him or
her may hurt your chances of a successful closing. Interview a few
practitioners and ask them how many buyers they've represented in a
short sale and, of those, how many have successfully closed. A
qualified real estate professional will be able to show you
short-sale homes, help negotiate the purchase when you find the
property you want to buy, and smooth communications with the lender.
(All MLSs permit, and some now require, special notations to
indicate that a listing is a short sale. There also are certain
phrases you can watch for, such as “lender approval required.”)
·
Title officer.
It’s a good idea to have a title officer do an initial title search
on a short-sale property to see all the liens attached to the
property. If there are multiple lien holders (e.g., second or third
mortgage or lines of credit, real estate tax lien, mechanic’s lien,
homeowners association lien, etc.), it's much tougher to get that
short sale contract to the closing table. Any of the lien holders
could put a kink in the process even after you’ve waited for months
for lender approval. If you don’t know a title officer, your real
estate attorney or real estate professional should be able to
recommend a few.
Some of the other risks faced by buyers of short-sale properties
include:
·
Potential for
rejection.
Lenders want to minimize their losses as much as possible. If you
make an offer tremendously lower than the fair market value of the
home, chances are that your offer will be rejected and you’ll have
wasted months. Or the lender could make a counteroffer, which will
lengthen the process.
·
Bad terms.
Even when a lender approves a short sale, it could require that the
sellers sign a promissory note to repay the deficient amount of the
loan, which may not be acceptable to some financially desperate
sellers. In that case, the sellers may refuse to go through with the
short sale. Lenders also can change any of the terms of the contract
that you’ve already negotiated, which may not be agreeable to you.
·
No repairs or
repair credits.
You will most likely be asked to take the property “as is.” Lenders
are already taking a loss on the property and may not agree to
requests for repair credits.
The risks of a short sale are considerable. But if you have the
time, patience, and iron will to see it through, a short sale can be
a win-win for you and the sellers.
* Not all real estate practitioners are REALTORS®. A REALTOR® is a
member of the NATIONAL ASSOCIATION OF REALTORS® and is bound by
NAR’s strict code of ethics.
Note: This article provides general information only. Information is
not provided as advice for a specific matter. Laws vary from state
to state. For advice on a specific matter, consult your attorney or
CPA.
