That Short Sale May Not Be A Good Deal
Lately – I have had many of my clients interested in short sales. I have tried to explain to them that not to be deceived by the name "short sale" because it's quite deceiving. Neither word, "short" or "sale" has any truth to it in this instance. The time a short sale takes is not "short" and it's definitely almost always never a "sale" in the sense of the word that includes a discount or "deal" of some sort.
Short sales take place when values drop and homeowners do not receive enough cash from a buyer to pay off their existing mortgages and think ONLY happens when lenders (the true "owners") agree to accept less than the amount owed to them in exchange for releasing the current homeowner from his/her obligations to the bank.
On the surface, it seems a short-sale buyer is getting a bargain. But, most of the time a buyer would be better off buying a home that is not in default and not a short sale.
Why?
First let me tell you that because agents get paid no matter what kind of sale, they're not going to tell you not to consider a short sale. But in the interest of bringing integrity and honesty back to the real estate industry (where, I feel it is severely needed) I will tell you the truth.
First, the Seller probably paid too much to begin with. If a home sold for $700,000 in 2005 and is now for sale at $500,000, 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 means the seller has no equity in the house and each of his mortgage payments has basically been trashed.
Next, the Seller probably borrowed too much against the house. Remember when HELOCs were ALL the rage and people were cashing out to go on trips? Remember those mortgage bankers that told you to refinance and cash out your equity and then you will be able to do it again in six months? What they were NOT counting on was the market crash and as well all know – it crashed. Hard. Years ago, the banks that were eager to lend money in upwardly moving markets – and they even let borrowers to over-encumber (that means owe more than it's worth) 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 are pressured by banks to appraise at the amount the home owner wants to borrow.
Next, remember, short sales have strict requirements. Inexperienced or unethical real estate agents might influence a seller into a short sale when the seller doesn't necessarily qualify. The banks require lots of things when determining whether or not to approve a short sale.
Another thing to remember is that, as a rule, homes sell at Fair Market Value. The bank that owns the short sale you are looking at is a highly sophisticated institution and knows exactly how much that home it worth. They will always get a comparative market analysis (something I provide all of my clients when they are considering making offers) to determine the value of a property. If the bank thinks it can make more money by foreclosing, it will not approve a short sale until it sees a profitable transaction for itself. Banks are here to make money – for themselves, not you. The bank will wait until it gets an offer at a price that it is willing to accept, and that price is going to be close to fair market value. If you are lucky enough to be dealing with an approved short sale. That is the minimum price that the bank will accept. Remember, this price has taken months to arrive at along with a lot of research and analysis. You can't haggle the bank into a lower price and you definitely won't get one below market value.
The condition of the home is another factor in considering a short sale. In regular transactions, closing costs, repairs and inspections can be negotiated and often shared between buyer and seller. But in a short sale, because the Bank is paying the closing costs more often than not, they are not going to pay for anything else. These other costs include things like: 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, and Deferred maintenance. Because lenders rarely will 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, you will probably pay for them out-of-pocket.
When do you want to move? If you are looking at a short sale, you're not looking at a 30-day transaction. 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 two 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. 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.
The Bank is in charge. 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.
These are all things to consider before and when buying a short sale. I'm sure you're thinking it doesn't as good as it seems. Great rule to live by: if it sounds too good to be true, it probably is.
As always, we at Crestico Realty are here to help answer all your questions about real estate. Please visit our website at
http://www.crestico.com for more information regarding this and any other real estate topic.
