Short sales are commonly seen in an economic downturn and are not as common in a high sellers’ market. There is often a lot of competition from investors waiting to get a good deal on a home. They look like great deals on the surface, but is buying a short sale right for you?
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What is a Short Sale?
A short sale is a real estate term meaning a house is being sold for less than (“short of”) what is owed. This normally happens when the borrower falls behind on payments. Additionally, they buyer has zero or negative equity, and uses a short sale to settle the debts as well as avoid foreclosure. The seller must prove hardship and that they cannot repay the remaining balance. This is done by providing bank statements and pay stubs. A short sale benefits the seller because it has less of an impact on credit compared to a foreclosure
The bank, and other lien holders that have financial interest in the home, are considered “third parties”. There are man third parties that can effect current market value. Some of those include, mortgage insurance, HOA’s, local and state taxing authorities. Also, contractors and bankruptcy trustees are other examples that bring down the market value and can lead a seller into a short sale situation.
Short Sale Process
Your real estate agent can help you find listings in your desired area that are marked as short sales. Your agent will pull “comps” or homes that have recently sold that are similar to the home you are interested in. You want to make sure you are getting a good deal because you are most likely on the line for closing costs and any repairs needed.
On short sale listings you may notice that it requires “Third Party Approval”. This means that even though you and the seller may come to an agreement, you must also get written approval from each third party. This includes all third parties that are financially involved in the home before you are officially under contract. In some cases, the sellers may have had an accepted contract previously. Including third party approval, only to have the buyers back out. In Utah, the status changes to “Price Previously Approved”. Your agent can find out what the third parties are willing to accept so you know how to structure your offer. However, these third parties have every right to reject any offer.
Third Party Modifications
If your offer is accepted, the third parties still have the right to modify the original “REPC” (Real Estate Purchase Contract, pronounced rep-c) that was between you and the seller to better fit their needs. These are called “Third Party Modifications”. Sometimes they affect the seller and other times the buyer.
Some examples of Third-Party Modification could be:
- Change or reduction in real estate agent commissions.
- Denying the buyers request for the seller to pay closing costs.
- Changing any dates agreed to, such as the settlement deadline.
- Denying any repair requests.
- Change in purchase price.
Third Party Modifications are not immediately binding to the buyer and seller. The changes requested will be sent over in an addendum to both the buyer and the seller to sign. The buyer and seller do not have to agree to these modifications, but if they don’t the third parties will not move forward with the short sale.
It will take a long time before you will hear anything from the third parties because they need to make sure they are getting the best deal possible. You can request they get back to you with-in a specific amount of time, but there are no guarantees. You will need to be patient with the process.
Once everyone is on the same page and written agreements are made you can move forward with inspections, due diligence, financing, and closing.
Long waiting period
While waiting to hear back from third parties a lot of things can change, for example: buyer’s interest rates can go up making it less affordable to purchase; the seller’s situation can change and end up keeping the home; or the bank gets a higher appraisal and rejects your offer. Be emotionally prepared to lose the home. Because buyers often back out due to changes in circumstance the seller has the right to take back-up offers while waiting to close on your offer.
Like mentioned above, you may be on the hook for paying your own closing costs. This is something most sellers provide when purchasing a regular home and might not be something you had considered. Talk to your lender about what you would need to have for closing costs at that price range so you can make an informed decision. While you’re at it, make sure they know your plan to buy a short sale and see if they can lock in interest rates for the duration of the third-party waiting period.
You may want to get extra inspections done such as mold, meth, or radon. Each inspection will add to your pre-purchase expenses, but they are important to consider. If your inspector brings up any large potential issues, like mold or a bad roof for example, you may want to pay for a company to come in for a detailed evaluation and give a quote for repairs. Which brings up the next issue.
A lot of times the sellers in this situation are not very happy about leaving their home. They can be angry at the bank and may take it out on the home at the last minute.
Ashley Reed, a REALTOR with the C4 Elite Real Estate Team says “I’ve seen homes where cabinet doors were taken off, garage doors ran into, and mirrors shattered out of anger. It is more common than you would think.” Short sales are sold “as-is”, there can be a lot of hidden issues and costs that your home inspector may not notice on the surface.
Short sales are often vacant and on the market for months, this can lead to a variety of issues. Pest infestations, vandalizers, squatters, frozen pipes, leaks, general filth, etc. can go unnoticed for a long time.
Lack of disclosures
Short sales often do not have sellers’ disclosures, so you won’t have as much information about the home’s history. Check to see if any unpermitted renovations were done and that what was permitted was approved. You could be on the hook for citations if anything were to go wrong. Look at any insurance red flags like if it’s in a flood plain. Talk to the neighbors about any issues the neighborhood has had, like sinking or poor drainage.
Short Sales are Tricky!
Short sales can be tricky! Have your financing lined up with different scenarios played out for your monthly payments. Ask about financing programs that will help you renovate. Give yourself plenty of time for inspections and due diligence. Get quotes for each issue that comes up so you are fully aware of how much it would cost to make it habitable. Be prepared to walk away if those costs get out of hand.
Is buying a short sale right for you? Hiring a C4 Elite Real Estate agent is a great step in the right direction. We can help you go over your specific needs and situation to determine your next step. As long as you are well aware of the homes condition and value, you can get a great deal on a home.