Wednesday, January 13, 2016 / by Bill Berning*
Buying a short sale property is much more complicated than a conventional home sale. Know what you’re getting into before making an offer.
You’ve found the perfect house, or so you think, but before you make an offer, find out whether it’s a short sale. Short sales are more involved, often take much longer than the run-of-the-mill closing, and contrary to popular belief, aren’t always a financial steal. Is the short sale you’re looking at worth the hassle?
A short sale differs from a foreclosure property in that the homeowner of a short sale still owns his house and has a say in its sale while the homeowner of a foreclosure property really doesn’t own his property anymore—the bank does. That means, if you are looking at a short sale, you have to deal with the homeowner and the bank that holds his mortgage.
This triangle can make a short sale exceedingly complicated. A short sale is so-called because the homeowner owes more than the house is worth. He is asking the bank to accept a loss. The bank, on the other hand, wants to get back as much of their money as they can. Understandably, they can sometimes be reluctant to negotiate, and some lenders even have a reputation for foreclosing and taking possession of the home rather than accepting a short sale arrangement.
Even though a short sale can be a difficult process to work through, in some cases, it can be worth the hassle since some short sales are priced below market value. Before you make an offer, though, know what you’re getting into.
You have to be patient.
First, you have to make an offer that the seller accepts. Then, he has to convince the bank to accept your offer. It’s a process that can take months of negotiations and back-and-forth. When there is only one lender involved, this process can take two or more months, but if there are multiple lenders (for example, he has a second on the property), it can take longer because each lender needs to approve the deal.
As an example, say your make an offer of $200,000 on a property that has a $250,000 primary loan and a $50,000 second for a total of $300,000 owed. Your $200,000 needs to satisfy both lenders. Typically, each would receive a portion of the $200,000 (for example, $190,000 to the primary lender and $10,000 to the secondary), but either one could reject what you offer them. The negotiations and squabbling could drag on for months.
With that in mind, buying a short sale property doesn’t really make sense if you need to move into a home by a certain date or if you need to sell a property before you can move into the home you are trying to purchase. Lenders prefer deals with no contingencies and flexible closing dates. They also like cash deals.
The seller has to be motivated.
Usually, the homeowner of a short sale property doesn’t want to sell; he’s forced to because of a job loss, divorce, medical expenses, or some other difficult event. So, while he realizes he has to take action to avoid a foreclosure, he may not be extremely motivated to keep the deal moving forward.
A short sale requires the homeowner to complete a short sale package consisting of a hardship letter explaining why he can’t continue to make payments, tax returns, bank statements, W-2s, payroll stubs, and financial statements. It takes time and effort to pull these documents together, and if the seller isn’t motivated, he may drag his heels or submit incomplete information. Either way, the bank won’t approve your offer until the homeowner provides them with the required information.
The listing agent does the work.
In addition to being at the mercy of the homeowner, you’re also subject to his agent since yours doesn’t have the authority to communicate with the bank. Before you make an offer, get a little information about the listing agent’s experience. Has he worked with short sales before? How many have closed? Does he personally do the work or hire a third party?
Less than half of all short sales are approved, so if you’re working with a listing agent who doesn’t have much experience (the third party he has hired), you run the risk of lowering your chances even more. On the other hand, if the seller’s listing agent is experienced and has a successful track record, you may have a slightly better chance.
Although you don’t have any control over the listing agent or the process, you can help keep things moving forward by responding to the listing agent’s requests in a timely manner. If he asks you to sign an addendum or get a document notarized for the bank, do so immediately. Failure to act promptly could delay the process or terminate negotiations altogether.
You may be one of many offers.
Depending on the home you are looking at and whether it is priced under market value, the seller could receive multiple offers. Technically, his agent is required to submit all the offers received to the bank, although this doesn’t always happen. At this point, the bank has the option to reject the offers, counter some or all of them, or pick one out and eventually accept it.
What’s the bank looking for in an offer? Generally, they’re looking at the bottom line and will accept the highest offer although sometimes other things factor into their decision, such as whether there are contingencies, whether it’s a cash deal, and if it’s not a cash deal, how much money you will be putting down.
There are risks.
The most obvious risk is that a lender can reject your deal outright, after you’ve spent months jumping through hoops. But, even when the lender approves the short sale, it can still fall apart. If the deal requires the seller to sign a promissory note to repay the deficient amount of the loan, the seller might refuse to go through with it. Lenders can also change any of the terms of the contract that you’ve already negotiated. If that happens, you may decide to kill the deal.
Also, it’s important to note that most of the time short sale properties are sold “as is” since the lender has already taken a loss on the property. In that case, you are assuming risk (and expense) of any repairs. Keep in mind that since the homeowner is probably not leaving the house because he wants to, he may have become emotionally detached and stopped taking care of it in the same way he would have before his financial woes.