Should I Purchase a Home Listed As a Short Sale
If you are watching real estate advertisements, Multiple Listing Service (MLS) information, or Craigslist, you cannot help but notice that many homes are offered for sale as “short sales.” You will also notice that many of these ads are often prefaced with the term, “Active Short Sale” (AS), or may be listed as an “Active Short Sale Contingency” (ASC). So, you may ask yourself should I purchase a home listed as a "short sale"?
A short sale is a “real estate sale in which the sale proceeds are less than the balance owed on the property's loan(s).” In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender.
A short sale is sometimes the most economical solution to a problem. Banks will incur a smaller financial loss rather than a foreclosure, while the borrowers are able to limit the damage to their credit history. A short sale can be faster and less expensive than a foreclosure. Lenders have loss mitigation departments that evaluate potential short sale transactions. Many have already pre-determined the criteria for such transactions, but they may be open to special circumstances, but their willingness varies. The unprecedented and overwhelming number of losses that most lenders have suffered since the sub-prime mortgage crisis has motivated them to accept short sales more now than ever before.
An “Active Short Sale” and/or “Active Short Sale Contingency” simply imply that the short sale is subject to the approval of the lender(s). All of the details of the transaction are subject to their approval including the accepted sales price, terms and conditions of the sale, and such issues as the “as is” condition of the property.
While a short sale purchase seems like a “win-win” for everyone involved, you may want to consider some other issues before you jump on the latest craze in home buying.
In order for a potential seller to discuss a short sale with his or her lender, they must be able to demonstrate that the sale of the subject property for less than the outstanding mortgage(s) is due to a financial hardship on their behalf. Inexperienced or unethical real estate agents may attempt to persuade 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.
If your seller has moved out of the short sale property and has left the property in the hands of the lender/bank to sell, they usually assign the listing to a real estate broker registered with them as a short sale specialist. Many times, the bank/lender relies on the broker to maintain, advertise, and negotiate the sale of the property for them. In effect, the seller is removed from many aspects of the transaction.
When this occurs, it is not uncommon for the seller to be less motivated to sell their previously occupied home. It is even more prevalent when they have already purchased a new home. It takes about two years for the effects of a short sale to reduce the negative effect on individual credit reports. Once the previous owner has vacated the property, the only leverage the lender or mortgage holder has on them is the promise to reflect the short sale transaction as favorable on their credit.
The lender may also hold a “recourse” loan, where the buyer is responsible to reimburse the lender for the amount of the mortgage not recovered from the short sale. In this case, as well as all short sales, there are tax liabilities to consider for the amount of debt reduced by the sale, and the capital gains realized from the transaction. Only after obtaining professional legal or certified public accountant (CPA) advice may alleviate any reservations the seller may have regarding this type transaction.
Lenders are very aware of the value of homes. They will insist on a comparative market analysis (CMA), or a broker price opinion (BPO), before they agree to a selling price of the property. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to the market value. Lenders accept short sales when the short-sale price of the home is at or near the market value.
Lenders will ask buyers involved in a short sale to purchase the home in its present or “as is” condition. To the potential buyer, this means that the lender typically will refuse to pay for any suggested repairs disclosed on a home inspection, pest inspections, or other work necessary to issue a clear pest report, roof certifications or roof repairs, deferred maintenance, or home warranty plans for the buyer.
In past practice, real estate professionals would serious counsel their clients about the pitfalls of purchasing a home in “as is” condition. So many unforeseen issues can potentially complicate the purchase and ownership satisfaction. It would seem that in a “short sale” situation the potential “as is” liabilities would be stressed even more with the buyer, however, that does not seem to be the case.
Many foreclosed homes have been sitting unoccupied for long periods of time and have become “wasted assets” with vandalism, thefts, local building code and maintenance violations, unpaid taxes and assessments, utility company liens for unpaid water, gas, electric, and sewer, homeowners fees and assessments, and a myriad of other technical barriers to purchasing them. Short sale properties oftentimes have some of the same types of problems as a foreclosure property and all of these issues will need to be resolved before you can expect the sale to close.
EXTENDED TIME TO CLOSE
It can take many months to get a response on a purchase offer from a lender. Much depends on the lender's backlog of short sales, number of other transactions, and how much paperwork has already been submitted on the property. If two lenders are involved, because there are two loans secured to the property, it can take much longer to satisfy the demands of the second lender.
Many lenders have acquired mortgages from other lenders, through mergers, or through reassignments to them from the original lender who is now bankrupt. There are many people in many departments that handle loans for each lender, in addition to their loss mitigation departments. Multiply this number of people by the number of mortgages on the property that you will have to negotiate, and you can see for yourself the time intensive challenge to close the sale.
REDUCED REAL ESTATE SALES COMMISSIONS
Generally, only lenders who have sold loans to Fannie Mae or Freddie Mac are paying traditional real estate commissions to real estate agents. Others are demanding a discount commission rate to brokers and agents. Agents may actually end up doing two to three times the work of a conventional transaction and are being paid less to do more work for a short sale.
If you have agreed to pay your agent a certain commission (percentage) under a buyer broker agreement, you may be liable for the difference between what the lender will pay and what your contract stipulates. The broker commission is also usually a percentage of the sales price; the renegotiated sales price by the lender, also effects the commission of the broker.
HIGHER CLOSING COSTS
Lenders will rarely pay for any extra closing costs for short sale transaction, unlike a seller who may be willing to cover some of your costs. If you want anything extra paid in escrow, be prepared to pay for them yourself. Sometimes lenders will refuse to pay for even standard seller closing costs such as transfer taxes. If you desire specific inspections on the property before you finalize a short sale purchase, you will probably need pay for them out-of-pocket.
LOSS OF CONTROL
If you are a “control freak” or you need to close escrow by a specific date, a short sale could be an obstacle. The closing process on a short sale can take an indefinite amount of time. The lender(s) controls the transaction, not the buyer, or the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, you may want to re-think your decision.
GOOD DEAL ANYWAY
Regardless of all of the issues involved in a short sale purchase, many buyers still feel it could be the way to purchase their dream home. The prices are so much lower and many of the properties have some of the most desirable amenities. Buyers feel that even with the added risk, it is just too sweet a deal for them to overlook.
The first rule to remember when purchasing real estate is location, location, location. We should also remember rule #2; never fall in love with any real estate.
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