Short Sales Explained, Part 2

If you’re in the market to buy a house, you’ve undoubtedly come across real estate listings that are “potential short sales.” Some buyers  think that means that they are automatically getting a good deal and some people shy away from short sale, not wanting to make the home buying process any more complicated than it already is, but what does buying a short sale really involve?

A short sale occurs when a mortgage lender agrees to accept the purchase price of a home as full payoff of the loan, even though the homeowner owes more than the purchase amount

This blog is the second part of a series about how short sales really work, this time from a buyer’s perspective.  For information on how short sales work for sellers, see Part 1.

The first challenge for buyers is identifying a real estate listing as being a short sale. When listing a short sale, the listing agent is required to identity that listing as a potential short sale. The reason that the short sale is “potential” is because there is never any guarantee that the sale will be ultimately approved by the seller’s mortgage holder.  Some key words to help buyers identify a short sale are “contingent upon lender approval,” “required seller documentation,” “short sale opportunity,” or “subject to contract approval.” If you see any of these phrases, you’re probably looking at a short sale.

Buying a short sale is more complicated and less secure than buying a traditional resale, so why do buyers consider it? Many believe that because a home is a short sale, they are getting a good deal. This is not necessarily true. Although the average short sale sells for 10% less than the current market value, they do not offer the same savings as a foreclosure, which averages 35% less than the current market value. Plus, fair market value is one of the main considerations of the lender when approving a short sale. The other reason that people buy short sales is because the only house that they can find that meets their needs is being sold as a short sale.

No matter why you’ve decided to move forward with buying a short sale, here are the issues that you need to be aware of.

1. The terms of the contract that you have negotiated with the seller are pretty meaningless. Sellers of short sales will often accept any offer because they are not making any money on the sale anyway and because they need a purchase and sale contract to be in place before they can move forward with the short sale approval process. Many buyers face disappointment down the line when they make a low-ball offer on a short sale and the offer is accepted. Just because the owner accepted the offer, does not mean that the bank will approve the contract. Typically, the bank will counter an offer months after the contract has been in place and they are not open to negotiations. The buyer can either accept the counteroffer, or terminate the contract.

2. Short sales take time. Lots of time. If you’re on a deadline and can’t offer flexibility about when to close, you should not attempt to buy a short sale. The average short sale takes 90 days after the contract is signed to get approval, but some have gone on for a year or more. Different lenders have different time tables and different sellers have different circumstances, so there is no way to know how long the approval process will take and there is nothing anyone can do to speed up the process. Buyers often become frustrated with waiting for approval and terminate the contract.

3. Short sales are sold “as-is.” When buying a traditional resale, buyers often have a home inspection and then approach the seller with a list of issues revealed by the inspection and negotiate repairs. This is not possible with a short sale because in order to qualify for the short sale, the owner has had to demonstrate financial hardship, including his ability to maintain the property. Essentially, if the owner had money to make the repairs, he wouldn’t qualify for the short sale. When making an offer on a short sale, I always recommend that my clients still ask for a due diligence period so that they can have a home inspection before being fully committed to buy the property, but this Is just so that they know what they are buying, not because anything can be done about the issues found in the inspection.

4. Special stipulations that protect the buyer should be included in the initial offer. Because a home inspection costs the buyer money, it is a good idea to stipulate in the contract that the due diligence period not begin until the lender issues approval for the short sale. The same is true for any other contingency periods in the contract including the financing and appraisal contingencies. There is no reason for a buyer to get his financing approved immediately after going under contract with a short sale because the approval will often expire before the short sale is approved and he will have to pay for all the expenses associated with loan approval, such as the appraisal, a second time.

If you’re trying to buy a home and keep finding short sale listings, I’d be happy to walk you through the process and help protect your interests. Visit Corners Realty Group’s Buyer Information page for more.