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.
Amber Castonguay, ABR, CDPE, E-Pro
