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.
