Is Buying a Short-Sale Really Worth It?

The general consensus within the current buyer pool seems to be that purchasing short-sales are the best way to get a good deal.  A lot of this seems to stem from the fact that people like the idea that they can buy a property for two-thirds or maybe even half of what it may have sold for several years ago.  However, how much a property has dropped in price may not always be a very good indicator of how good a deal is.  A better indicator is how much below CURRENT market value a property is priced.  It is true that some short-sales are priced below fair market value and can be very good deals…as long as you’re prepared to weather the storm that comes with them.

Short-sales are called such, because the homeowner owes more on the house, than the house is actually worth.  So even though technically they are the owner on title, they still have to get bank approval in order to sell the house at a loss, because usually in the end it is the bank that takes that loss.  The bank does reserve the right in many situations to attach an unsecured deficiency judgment to the homeowners credit report, and does so in many cases.  This is important for the buyer to know, because if the homeowner/seller isn’t aware of this risk upfront, it could kill the deal in the eleventh hour.  Once they get to closing and are presented with a document from the bank stating that the bank reserves the right to pursue the homeowner for this deficiency, the homeowner may decide to refuse to sign the closing docs.  Which ultimately means the buyer does not get the house.

Some of the other items that could arise during a short-sale are unpaid utilities, unpaid Home Owners Dues (for condos), negotiation fees, repairs and timelines.  Unpaid utilities and HOD’s, can usually be assessed up front.  A call to the city and the homeowners association will usually reveal whether or not both items are paid current.  Negotiation fees should also be stated up front.  This is the fee that is paid to the negotiator representing the homeowner.  Granted, on the surface it may seem odd that the buyer would have to pay this.  However, typically for a homeowner to be approved for a short-sale in the first place, they have to prove that they can no longer make their payment because they are insolvent.  The bank will generally not pay for it as it is paying for the representative that is negotiating against them.  So the fee is typically passed on to the buyer.  In some instances you may ask for the homeowner to give a seller credit, which in turn can be used to pay for the negotiation fee.  However, lenders will typically not allow a buyer to receive more than 3% of the purchase price in the form of seller concessions.  So if you were planning on using that 3% towards your closing costs, there may not be enough left over to cover the negotiation fee.

Repairs and timelines can often be the items that are harder to account for on the front end, before actually getting into contract.  From a buyers perspective, it is usually a good idea to plan on not being able to ask for any repairs on inspection.  As I stated before, the seller is insolvent and typically cannot afford to make any repairs.  They also don’t stand to take any money away from the table, so they don’t really have much of a vested interest in making repairs to the property.  The bank is not actually party to the contract, so they also will not make any repairs to the property as they have no authority to do so.  This may not be an issue for you, as long as you’re aware of it going into the situation.  The other item that can be hard to pin down is when is the transaction actually going to close.  It often can take the bank 3-6 months to approve a property for short-sale.  Once they do approve the transaction they usually want to see it close within 30 days.  So if considering a short-sale, it is beneficial to be in a month to month rental situation so that you can move at a moments notice.

These are only some of the things to be aware of when purchasing a short-sale.  All of these situations may not occur simultaneously, however one or two of them often coincide together.  If you’re thinking about buying a short-sale, or just buying in general, go to our Calendar page and sign up for one of our FREE seminars.

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