The Short Sale…this has become a household term in today’s real estate market. What is it? This occurs when the owner of a property owes more on the house than it is currently worth on the open market. When this owner needs to move, they request the lien holder to take less than what they owe, in order to facilitate a sale of the property. Currently, 32% of our market consists of short sale listings, however, there are a bunch of agents who are not setting the right expectations to their clients in regards to short sales, for both buyers and sellers.
Having poor seller representation in a short sale is far worse than a traditional sale because the home owner is relying on this individual to help them navigate out of a financially difficult time. Without a short sale approval, the most likely outcome is a foreclosure which is the very thing a seller was trying to avoid by going the short sale route.
On the same note, setting unrealistic expectations to a buyer looking to “cash-in” on short sales in equally disturbing. Buyers who are tight on cash, need to move within a short time-frame, or are currently between homes need to be aware of the potential pitfalls and costs associated with this special transaction.
Below are some of the reasons why you should rethink buying a short sale and why as a seller, you need to have a professional protecting your interests.
Low ball offers ~ Not gonna happen….if you think that you will be able to get a property at 40% of its market value by buying a short sale, you are gravely mistaken. Although short sales represent a good value, the lien holder is not willing to just give the property away. What needs to be understood is that once the seller requests a short sale from the lender, that lender will be sending out an appraiser and/or other real estate professionals to give them an unbiased opinion on the current market value of the property in its present condition. The offer price better be within the value range compiled, otherwise, the lender will not even consider the offer and it will be rejected.
Show me the money! ~ In Pennsylvania, the typical deposit when buying a home is $1000 at time of the offer with an additional deposit due within about 2 weeks. This can range depending on the cash position of the buyer along with the financing the buyer is going to obtain. This is negotiable, however, the purpose of the escrow deposit is to show the good faith that the buyer is not looking for an easy out and they are interested in moving forward with the transaction. Put some skin in the game so to speak. Putting up $500 is not going to cut it with the lender.
Waiting to do the inspections ~ This is a biggie. The buyer does not want to spend the money on inspections to not have the short sale approved, then have spent that money in vain. However, the seller is not going to wait for the short sale to be approved and then have the transaction held up over some missing handrails or other little inspection issues. The buyer should perform their inspections upfront, within the usual time-frames, and fully expect to lose that money should the sale not be approved. This is where a buyer who is tight on cash should not enter into these transactions. If you cannot afford to lose $500 in inspections, don’t offer on a short sale! As a buyer, you do not want to wait on the approval for the short sale, then discover there is an issue you are not willing to accept. This will cause you to lose opportunites that may have come on the market during your waiting time.
Making the signing date of the agreement of sale to be after short sale approval ~ You are either going to purchase the home or you are not. Everything in the agreement of sale will be negotiated upfront. The seller will not take the house off of the market, submit all of the paperwork required to facilitate a short sale, and then not have a valid contract. The Pennsylvania Association of Realtors has created a specific form adding a contingency for short sale approval, however, all other terms of the agreement of sale shall remain in full force and effect.
Stalling on getting a mortgage commitment ~ As a buyer, you have 10 days from acceptance of seller to apply for a mortgage as per the mortgage contingency in the agreement of sale. Do not wait until short sale approval to get the formal commitment. Most lenders, once the short sale is approved, are looking for a quick settlement, typically within 30 days. The lender will not be waiting for the buyer to finish up any details on their financing. The commitment may also be needed as part of the short sale approval process with some lenders. Get it done right away. You do not have to lock in your rate, as settlement is usually an unknown, but make sure all other conditions of your lender have been met.
Closing Date ~ As I stated above, the closing date is really an unknown. There are many steps that need to be performed on the lender’s side of things and they take time. As a buyer, you need to be aware of this. Don’t make plans on moving out, cancelling your lease, arranging closing on your current home, etc, until you get the short sale approval letter from the lender! For agreement of sale purposes, enter “within 30 days from short sale approval”. You can not put an exact date when we don’t know when it will be! Again, if you are not comfortable with this, do not enter into a short sale transaction!
These issues are a part of life when dealing with short sales. If you do not have the stomach for it as a buyer, stay away. I do not mean to talk you out of short sales completely as they can represent a great deal, especially with the current inventory on the market. Just be aware of the waiting time-frame, the unknown closing date, and the risks financially. As a seller, make sure that you have a professional who knows how to navigate these waters as it can be the difference between getting the short sale accepted by the bank, or foreclosure. Short sales are still a much better financial decision in regards to your credit and when you will be able to purchase another home.
Should you have any questions regarding the short sale process, please call or email me and I would be happy to assist.