10 Reasons Not to Buy a Short Sale
Short Sales Aren't Always a Bargain for Buyers
Short sales happen when home values fall and sellers do not receive enough cash from a buyer to pay off their existing mortgages, providing lenders agree to take less than the amount owed to them.
On the surface, it may appear that a short-sale buyer is getting a good deal. Although a slim margin of short sales may be profitable for a buyer -- because there are always exceptions -- much of the time, a buyer would be better off buying a home that is not in default.
You are unlikely to hear real estate professionals tell you that it's not a good idea to buy a short sale. In part, that's because real estate professionals profit on a short sale. Everybody makes money except the sellers and buyers. Realize, too, that listing agents might push sellers to list as a short sale, because if the sellers went through foreclosure, the listing agents will not get the listing.
In Phoenix, where we work, for example, many agents ignore short sales like the plague.
Here are 10 Reasons Why Buyers Might Not Want to Buy a Short Sale:
1) Sellers Paid Too Much.
If a home sold for $500,000 a few years ago and is now for sale at $300,000, that doesn't mean the buyer is picking up $200,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It simply means the seller has a negative equity.
Here in Phoenix, homes purchased between 2004 and 2007 are probably great candidates for short sales. Why? Because the original buyer (who is now the seller) bought the property during the real estate boom and the market has now corrected.
2) Sellers Borrowed Too Much.
Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower's loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers were pressured by banks to appraise at the amount the home owner wanted to borrow.
Those days are gone for now, but the fact remains that what the seller owes on the property means nothing in terms of what you can buy it for today. If a home is listed for $250,000 today, and the seller owes over $500,000 on the property, that ONLY means that he owes more than what it's worth. The difference is NOT a savings to the new buyer!
3) Stringent Qualifications.
Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.
What does that mean for you? It means that you and your money may be tied up for MONTHS only to find out that the seller doesn't even qualify for the short sale to begin with!
4) Homes Sell at Market Value.
Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, that's exactly what will happen.
the lender may also refuse your offer completely (after you've waited patiently for a decision) and hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.
What does that mean for you? It means that you could sit in escrow for months - waiting to close on a short sale - while real sales and foreclosures happen all around you, only to find out that you've saved nothing for all of your troubles.
5) Homes Sell "As Is".
If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:
- Suggested repairs disclosed on a home inspection.
- Pest inspections or work necessary to issue a clear pest report.
- Roof certifications or roof repairs.
- Home protection plans for the buyer.
- Deferred maintenance.
Add this to the fact that the seller is most likely not doing anything to maintain the property, since there is no payoff for him, and you are potentially getting a home with loads of deferred maintenance. The cost of these repairs should be added to the purchase price when determining what kind of "sweet deal" you're really getting on this property!
6) Length of Time to Close.
Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from six weeks to six months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.
We see this scenario time and time again. We wait and wait for approval from the first lender and when that finally happens, the second lender shoots the entire offer down.
7) Lenders Can Change Conditions.
Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.
8) Higher Buyer Closing Costs.
Because lenders rarely pay for any extras (like a seller would be willing to do) if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, home warranties or a termite treatment you will more than likely pay for them yourself.
Again, the cost of these extras should be added to the purchase price when determining what kind of "sweet deal" you're really getting on this property!
9) Lose Control of Transaction.
If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.
By the same tolken, we have access to a very limited amount of information regarding where we are in the short sale process from the listing agent. Because of this, we must rely heavily on what this agent is telling us - and if it's not the truth, we have no way of finding out. Most of the listing agents we know are hard-working honest people, but we don't know everyone and we may not know the agent that listed the short sale you've fallen in love with.
Many times, the listing agent has limited knowledge on the short sale process and can misrepresent their past successes with other sales. A listing agent MUST know what they're doing for the short sale process to be even remotely successful. Bank negotiators will not process a file if the sellers' short sale package is incomplete, and it's often the listing agent's responsibility to get this done right. If it's not, that file will go to the bottom of the pile.
10) Little Seller Motivation.
When the seller is faced with the required paperwork that can put a closing packet to shame, he can drag the process on indefinitely. Remember that many homeowners who become involved in the short sale process are ONLY doing this as a means to stave off foreclosure and buy time to relocate. That says alot when trying to assess the motives of a seller that's involved in a short sale.
When the seller ultimately discovers that the short sale effect on his credit is close to that of a foreclosure, there is little incentive for him to cooperate with the short sale process. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.
More about Short Sales:
How Long Do Short Sales Take?
Most lenders are so swamped with short sale submissions that its employees can't respond in a timely manner. What once took two months can easily take six months.
The short sale process, from submission to short sale approval, is generally as follows:
* Submission of offer and complete short sale package from the seller.
* Bank acknowledges receipt -- 10 to 30 days.
* Bank orders a BPO or appraisal -- 30 to 60 days.
* File is reviewed -- 30 to 60 days.
* Negotiator is assigned -- 30 to 60 days.
* Level II negotiator may be assigned -- 30 to 90 days.
* File is approved or rejected -- 60 to 120 days.
If you're running past 120 days, it's possible that the listing agent or a third-party negotiator is not on the ball and is lax about calling the bank. Calling the bank means waiting on hold anywhere from 10 minutes to an hour or longer.
Or, a lengthy short sale period can also mean the bank has internal problems, not enough staff or has lost the file a few times, prompting the listing agent to resend the package over and over.
It can also mean that the appraisal is substantially higher than your offer, and the listing agent is building a case for a new appraiser.
Unfortunately, you can't always avoid problems on a short sale. Patience is key. Threatening to walk away means nothing to the bank. If buying a short sale property is your only option, your best bet is to stick it out and wait.
Comparable Sales For That Short Sale House
Some short sales are priced ridiculously low. So low that the sellers' bank will never accept them. These types of listings receive multiple offers. To get your offer accepted, it will need to be priced near market value. If you're not prepared to pay above a superficial price on a lowball short-sale listing, then pass.
As always, we're here to help when you need us.
Just Call Don at (602) 795-2260 or Maureen at (602) 327-1781
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