Short Sale Guidelines
What are "Short Sales?"
Short sales are a segment of the real estate market which have become more abundant in recent times, and as a result have become a topic of considerable interest.
A short sale typically occurs when a homeowner has a hardship situation and needs to sell their home but the proceeds from the sale of their home will be insufficient to pay off all debts associated with the property. These debts can include mortgages, liens, and closing costs that the seller may owe.
On the surface, short sale listings appear quite attractive to buyers because the list prices of short sales tend to be lower than the prices of comparable properties in the surrounding area.
If you are a homeowner who is upside-down on your mortgage and owe more on your home than it may be worth, contact us today for a confidential review of your home and potential options.
It takes an very experienced Real Estate Agent to successfully negotiate a short sale. At Prudential Network Realty, we have extensive knowledge of the process. There are several significant considerations potential buyers should be aware of before making an offer on a short sale. Below are some of the considerations:
Disadvantages to buying Short Sale Properties: Your rights as a buyer are very limited when dealing with a short sale property.Even if the seller accepts your offer and signs the contract, the lender provides the final approval for the transaction. We have seen short sales in which the lender has cancelled the transaction on the same day that it was set to close. This can be very disappointing and costly because buyers have no recourse, and are unable to recoup any of the costs incurred during the escrow period such as home inspections and appraisals which can end up costing the buyer thousands of dollars.
You need to be flexible on when you close. The short sale transaction process is anything but short. We have seen short sales in which it has taken up to 6 months to process and close the transaction. This time lag can be especially detrimental in today's buying environment, where interest rates can change at any time. An increase in interest rate during the escrow period can adversely affect your mortgage payment amount by several hundred dollars per month, which can result in the property becoming unaffordable for you.
Short sale sellers try to secure as many offers as possible--even after they have an accepted contract--which keeps buyers in limbo. In regard to non-short sale transactions, when a seller accepts an offer, the status of the listing is normally changed from "Active" to "Pending." The difference with short sales is that in most cases, the seller will keep the property marked as "Active" after accepting an offer, with the intent of attracting more buyers so that they can get an offer that is higher than the one they initially accepted from you. If they do receive an offer higher than yours, the bank is extremely likely to accept that higher offer, and you would essentially be out of luck. We have seen short sale transactions in which up to 3 buyers have all had accepted offers from the same seller, and all 3 buyers had to wait months to hear back from the lender as to which of the offers the lender would accepted.
You will need to bring additional funds to the closing table to pay for the seller's closing costs. In a normal real estate transaction the seller pays their own closing costs, which include costs such as termite reports, title fees, recording fees, and pro-rated property taxes. These closing costs are normally paid using the seller’s proceeds from the transaction. In a short sale, however, the buyer may need to pay for most or all of the seller's closing costs because there is no equity for the seller to use to pay for their closing costs.
You will need to do a lot of follow-up. It is essential to monitor the lender during a short sale to make sure that there has been a stay placed on the foreclosure action. This information can be difficult to attain, and if the property isn’t monitored effectively, it could go into foreclosure, and be taken off the market--even if the seller has accepted your offer.
Your closing must be completed quickly. Though approval from the lender can take several months to receive, once the lender accepts your offer, you must close the transaction within 14-21 days. If closing does not occur in that time frame, a fee of $150 per day paid can be assessed to you, the buyer.
The Seller is not likely to make repairs, replacements, or even clean the property. In a short sale transaction, the real seller is the lender. If the short sale property has defects and needs repair, the lender may be unwilling to pay for them. To put this into perspective, once you finally get into escrow with the property, you find out through the home inspection that the home needs a new roof and has foundation damage. You will have to pay for these repairs if you want to close the transaction. As a buyer, you have the option to cancel the transaction based on the home inspection, but if you want the property, the cost of any repairs falls on you.
When dealing with short sales, there can be a substantial amount of liability for the buyer. The potential does exist for you to make an offer on a short sale property, and wait 4 months before getting your offer accepted by the lender. During those 4 months, interest rates could go up by 1 pt, reducing your buying power by 10% and increasing your monthly payment by hundreds of dollars. Once you finally open escrow on the property, you determine through the home inspection that it will cost you more than $60,000 to fix the roof and foundation in order to make the house inhabitable.
If you decide that you are willing to pay for the cost of the repairs and want to move forward with the transaction, the lender still has the ability to cancel the contract at any time. If the lender does cancel at the last minute, you will be unable to recoup the costs that you have already sunk into the transaction such as the home inspection, appraisal, and any repairs that have been made. In addition, you, as the buyer, will have missed the opportunity to purchase the initial property, in addition to having missed out on any "good deals" that came on the market in the 5+ months that you were under contract with the initial short sale property.
Every individual has a different level of risk tolerance, and understanding your own personal risk tolerance is one of the major keys to having a successful real estate transaction. The potential exists to find a good deal with a short sale, but there is clearly an increased level of risk for buyers.