Buying a Short Sale: Is It Really a Great Deal?
In todays real estate market the term “short sale” instantly comes to everyone’s mind when looking to purchase. Most Buyers think it is a great deal, however, they are typically unaware of the issues that this type of transaction brings to the table. What is a short sale? A short sale is an “arrangement” between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.
The first and probably most important issue a Buyer must understand in the short sale process is that they must be Patient! A short sale can be as fast as two months; however, the process typically takes between four and six months. So if you need to close by a certain date or you are in a situation that requires an immediate response, a short sale is not the transaction for you. Why does it take so long? The Lender wants to make sure that a Seller is not just trying to get out of a mortgage on a house that has gone down in value. If the Seller has liquid funds, the lender may want the Seller to use them in the sales process. The Lender also wants to make sure the Seller is not selling the property to a related party for the sole purpose of locking in a reduced pay off. The bottom line is that the lender is going to manage the transaction with the objective of recovering the most money for the Lender. The time frames involved cover a multi-step negotiation process between the Seller and the Lender with either the Lender or Seller objecting to certain terms and making various counter proposals before coming to a final agreement. Third party inspections and BPOs will also need to be done before the negotiations can be formalized in an agreement.
The second issue facing a Buyer in the short sale process is purchasing the property in “as is” condition. The Seller is already upside down in their loan and there is no extra money for repairs or repair credits. Typically, the lender is not willing to kick in for most repairs. Now that being said, banks will consider major repairs or deficiencies such as mold, roof replacement or heating and air conditioning replacement as they understand they will be the ones eventually dealing with these issues if the property is foreclosed upon. The bottom line is when it comes to repairs there will not be a lot of give from the bank. Unfortunately, most Buyers are not only looking for a great deal, but they also want the property to be in perfect condition.
The third issue facing a Buyer in the short sale process is after all the waiting and the back and forth with the Seller and the Lender the short sale may be denied. There are a number of different factors that this could happen. The most typical reason comes down to purchase price. Most Lenders are looking to make about 80% of the principal loan balance, now which is not to say they will not take less at times. At this point the Buyer should be ready to pay more for the property if necessary to keep the transaction together. If they are unwilling to do so most transactions are canceled.
Now after hearing all the pitfalls and issues which could arise during the short sale process, and a Buyer chooses to move forward there are three simple rules they should follow: 1) Present a good offer. This may take some extra due diligence on behalf of the Buyer, but you do not want to waste your time. 2) Be patient. The process can take up to six months so be ready to wait. 3) Use an attorney experienced in dealing with short sales. This will make the process a lot smother and possibly allow the Buyer with other options they might not have had otherwise.
Please contact the Law Office of Jason M. Chmielewski, P.C. at (773) 489-6806 or email atJason@jmclawgroup.com if you have any questions regarding the short sale process or any other real estate matters.