Buy a Short Sale
Are you thinking of purchasing a "SHORT SALE" property?
Before you do, there are some things you should know!!! First of all, let me begin by saying that I have been successfully been doing short sales since 1992, when the defense industry died in California. I jokingly say that I was doing short sales before the rest of the country even knew what they were... But that is not far from the truth! The most important thing you can do BEFORE ever thinking of getting involved in the purchase of one of these homes, is to have a Realtor who is VERY familiar with these transactions and have successfully completed numerous short sales! I find there are lots of agents out there that say they know about short sales, only to find out they do not have a clue once we get into the purchase. Going to a "short sale seminar" does not an expert make!
Okay, let me get off my soap-box!
Let's begin with the basics. There is absolutely nothing short about the time it takes to do a short sale!!! The name "short sale" is due to the lender(s) agreeing to take a short pay-off for the money owed. Actually, they take an extremely long time from beginning of the process, to the end. So if you have to be in a home within a specific period of time (less than a couple months), a short sale property may NOT be the right home for you.
What is a short sale?
Let's assume that you owe $300,000 on a home. The current market value of the home if you were going to competitively sell it on the open market is $200,000. You do not have the $100K difference plus costs to bring to the closing table to pay off the difference, so you opt to do a short sale. By doing so, the lender agrees to accept the $200,000 minus costs of sale as payment in full on your loan and negotiate on how to handle the difference. (Sometimes the lender will discharge the remaining balance, ask for a partial payment of the amount OR ask the seller to sign a Promissory Note. None of these are of the buyers concern or business as they are an agreement between the seller and THEIR lien holder). In the process, the seller may ruin their credit for several years, but for some, it is their only option.
Short Sale Pricing:
In most cases, Short Sale home prices are set either by the Lien Holder in 1st position OR the Listing Agent. Pricing of a short sale is like walking a tight rope, in that it must be done by a professional in that area. Short sales are generally priced below the market value to get multiple offers from buyers, and low enough to provide an incentive to hang in the deal for the months and months that it takes to complete the transaction. You can not go in and low ball this price and expect to get the home any longer! These homes are already below market, and the net to the bank must be enough to satisfy the minimum ratios required by the investor. The offer must meet the ratios so that it is more profitable to the lender to accept than letting it go to foreclosure or auction. Review the neighborhood comps of recent homes with your Realtor. Know what you can ask for in concessions, terms and conditions BEFORE you submit an offer. You must understand that the seller is only the first stop toward approval. The sellers lien holder has the final approval on all terms, conditions and on the final price! Sales prices can change throughout the process, right up until you have written Bank Approval.
Short Sale Risks for the Buyer:
The biggest risk for buyers in a short sale purchase, is that you may not get the home, even after months and months of waiting. There are NO guarantees for buyers until the seller and their lender have reached an agreement and a written Approval Letter is received.
Other risks for buyers purchasing a Short Sale are: SOME short sale properties will not have documentation about the home, that a "normal" resale home would. These often include Disclosures (such as a SPDS) that are filled out by the seller giving the history of the home while they had it. Disclosures contain a lot of valuable information, like if the seller has had any problems with the home in the past, if they are aware of any present problems and information about the utilities, etc..
Another document that MAY NOT be available is called a CLUE Report. This is a 5 year (or less on homes less than 5 years old) history report from the sellers home insurance company that will let you know if there has been any claims made on the property. This can alert you to things such as flood damage, mold hazards, storm damage, etc. This will let you (and YOUR home owners insurance company) know if the home is insurable before you purchase the home.
Almost always, home warranties are NOT included on short sale properties. These are the one-year warranties available on homes at the time you purchase the home. In a normal sale, these are negotiated between a buyer and seller. In a short sale property, if you want a home warranty, you will be the one who has to purchase it. I WOULD DEFINITELY RECOMMEND PURCHASING A HOME WARRANTY on the purchase of ANY resale home!!! Ask your Realtor about the home warranty companies. Their costs and coverages vary.
Another thing to consider..
Pay very close attention when you are looking at a home that is a short sale, what UTILITIES are ON and which ones are OFF. YOU need to ask the question! "IF I MAKE AN OFFER ON THIS HOME THAT IS ACCEPTED, WHO IS RESPONSIBLE FOR TURNING ON THE UTILITIES PRIOR TO INSPECTIONS?" Almost ALWAYS, that responsibility (and cost) will fall on YOU!!! If you think about it, the lender isn't putting out another dime since they are loosing money as it is. The seller often hasn't got the money to continue to pay their utilities, let alone turn them back on once they are off. That leaves YOU. Generally, this is okay to most folks since you will be moving in within 30 days anyway. Make sure this is in WRITING in the purchase contract, either way. -- Also, YOU MUST WAIT UNTIL YOUR DEAL IS ACCEPTED and Short Sale Approval Letter is received. Technically, you are NOT the buyer until the short sale lien holder Approves the Short Sale and states YOU are the buyer! You will then need to turn them on prior to the inspections and appraisal. If the home is NOT acceptable to you and you will not be completing the deal within the time period specified, turn them off immediately and notify the utility company you will not be purchasing the home. Again, putting out the money to do this prior to inspections, may save you thousands in the long run! If you decide to proceed to closing, the utilities are on for you to move in at closing.
What exactly is AS-IS on Short Sale Homes?
These homes are ALWAYS sold in AS-IS condition! Buyer's have the right (at their own expense) to do what ever inspections they feel necessary. Additionally, some inspections may be required by the buyers lender (if not a cash sale). However, at the end of the inspection period, the Short Sale transaction is a go/no go situation!! You can NOT submit a repair request as can be done in a traditional sale. You either accept the home AS-IS or you can cancel out of the deal by the end of the inspection period. Inspections do NOT begin until after APPROVAL is received from the short sale lien holder! Now days, short sales will come in a variety of conditions, unlike in years past. Some are pristine, most need a little cosmetic work such as paint or minor repairs, yet others have serious issues. You need to make sure an take an honest look at how much money is going to be needed to make the home in livable condition. Short Sale lien holders are NOT going to renegotiate the price after the approval letter, NOR will they make any allowances for "redecorating" to your taste or color scheme.
There is an inherent risk in purchasing one of these homes because as we already discussed, you MAY not know the history and now, you must agree to purchase the property AS-IS? This is true, but there are things you can do to help the situation. Again, you need a GOOD and EXPERIENCED Realtor!
SO TO RECAP: Although you agree and must sign the AS-IS form, you still maintain the right to do full inspections on the home. DO NOT CONDUCT ANY INSPECTIONS UNTIL YOUR OFFER IS ACCEPTED BY THE LENDER. (If you do and your offer is not accepted, you are not only out the cost of the inspections, but you may not end up owning the home either). Once you have received the word your offer is accepted and the terms are agreeable, then you have the right to conduct whatever inspections you desire within the time limit you specified in the purchase agreement. (In Arizona, this is often 10 days unless otherwise specified). THESE INSPECTIONS ARE TO BE DONE AT YOUR COST AND ARE NOT REFUNDABLE IF YOU WALK AWAY! At the end of the inspection period, you have 2 options: 1) Accept the property with all the faults found in the inspections and proceed with the purchase OR 2) Cancel out of the contract based on the items found during the inspection. Again, you need a competent Realtor to ensure you get the earnest money returned to you if the purchase is canceled due to inspections. Home inspections run a few hundred dollars and are the best deal you can get when purchasing a short sale. Even if you walk away from the deal, better to loose a couple hundred dollars because of an item found on an inspection VS purchasing a home with thousands of dollars in unknown defects. -- You do NOT have the option to request repairs in an AS-IS deal, like you would be able to request in a "normal" transaction.
Throughout this process you must remember that YOU MUST BE PATIENT !! Rarely, do these transactions take less than 90 days from the time you submit your offer, until you will be in the home. No amount of bugging your Realtor, threatening to walk out on the deal, or anything else will make it go faster. It is totally out of your Realtor's hands. Most Lenders do NOT work on weekends, so updates can not be provided then.
There are a few things that you can do to help the process go smoothly as possible. The buyers in most short sales, also have to be approved by the short sale lender. There are some "buyers" who are not allowed to purchase due to some possible fraud in their past, so most SS lenders need to ensure the buyers are not on that list.
Often, the SS lender will have specific addenda or documents you will need to sign. Without these, the SS Lender will NOT sell the home. There is ALWAYS a time limit on getting these documents back to the SS lender so get them done as soon as possible! There are strict rules, laws and regulations requiring what is called an "Arms-Length Transaction". They basically say that you are not related to the seller in any form or fashion... which includes any business dealings. All of these documents are signed under perjury of law and you can be prosecuted should fraud be discovered. Also, if you are purchasing as a business, LLC, PLLC or another entity, additional documents will be required such as Articles of Incorporation.
My Offer Has Been Accepted... Now What?
Congratulations, the lender(s) have agreed to accept your offer on the home. Now, you have to get busy. Even though you have been waiting an eternity for the lender to accept your deal, you must now complete the transaction within the time specified by the SS Approval Letter. You need to get your loan documents completed as required, inspections done, etc.. Your Realtor will help you through the rest of the escrow process, making sure that you can receive clear title at the end. Often there are (monetary) penalties, that the buyer is responsible for if the home does not close by the date in the lender approval letter. It is VERY important you, the Title Company, and your Realtor get the transaction CLOSED by that date! Extensions are at the sole disgression of the SS Lien Holder and often do not come without severe penalty to the buyer! They are NOT an automatic thing.
Now that I have totally scared you, Short Sales do present you a good opportunity to purchase a home at a good value, if you are not in a hurry and have patience.
If you would like addition information on homes available, call or email me!
To explore your options, contact:
Vicki L. Watson, PLLC
(520) 204-3474 - Cell