3 Things to Consider When Buying a Short Sale

In today’s real estate market it’s nearly impossible for those looking to buy a home in Chula Vista or San Diego County for that matter to avoid running into Short Sales.
A Short Sale is the sale of a property in which the proceeds of the sale will be insufficient to cover the lien attached to that property. In other words, the owner owes more on the home than it is worth today. So why would anyone do that? In a Short Sale situation the homeowner has experienced some kind of financial hardship and is unable to continue making his mortgage payments to some degree. In order to avoid foreclosure, the homeowner decides it is best to sell the home with the approval of his lender and be released from his debt.
Yes, the lender must agree to the Short Sale sice the lender will be incurring the loss from the difference. This brings us to point number 1.

1. Time
Since most home buyers aren’t familiar with the Short Sale process many enter into transactions in which they were not mentally prepared for. It is best to understand what happens behind the scenes before jumping in head first.
The biggest missconception when it comes to foreclosures is the notion that since the bank calls the shots, this will be like a bank owned property. That couldn’t be farther from the truth. When a property has been foreclosed on by the bank, they have no other options. They will sell the property and have a strong motivation to remove a non-performing asset from their financials. After all, banks only make money when they receive mortgage payments. Foreclosure = $0 + property taxes, HOA fees, etc… So you can see why the procces can be rather simple.
On a Short Sale, the lender has little incentive to speed up the approval procces not to mention they don’t own the property. Even if the homeowners have been behind on their payments, to the lender’s investors, that loan is still considered an asset. Why would you be in a hurry to get rid of an asset? The financial industry is quite complex, which is why most often we are left scratching our heads and thinking “that doesn’t make sense”.
The fact is on average, it will take 3 to 6 months for a Short Sale to succesfully close. You may need to wait for several approvals if there are 2nd and 3rd loans on the property.

2. The Price Might Not Be Right
Many buyers are drawn into Short Sales because of their pricing.
I see many Short Sales which arrive on the market 5-10% below fair market value so it’s easy to see why many are attracted to them. Here’s the kicker, the listing price is NOT the price the lender wants for it! The way most real estate agents work Short Sales is by under pricing them in order to get as many offers in the shortest amount of time. This allows them to submit an offer to the lender within days after listing the property. Since the agents are already familiar with the time involved in the process, many aren’t so willing to wait for the right offer to come.
When an offer is submitted for the Short Sale, the lender will order a BPO (Broker Price Opinion), which is essentialy a mini appraisal of the property by a local real estate professional other than the listing agent. That is how they determine how much they will accept. It is common for a lender to demand a higher purchase price from buyers who have submitted their offer, especially when closing costs are involved in the transaction.

3. Seller Motivation & Obligations
Few people really think about the seller’s situation when pursuing a Short Sale.
In fact, the seller in most cases can mean the difference between a succefull sale and a mess.
Homeowners facing foreclosure aren’t always in the best mind set financially or emotionally. Some look to the future and are eager to get this chapter of their life closed and move on, while others are stuck in the past, reliving the memories created in their homes and dwelling on their circumstances. These folks are the ones that will flip flop between a Short Sale and a loan modification at the last minute leaving you, the buyer with 6 months of waiting for nothing.

The seller’s obligations are a big factor in a Short Sale. Many unable to continue making payments on their mortgage also stop paying for their HOA fees which can cause problems in the Short Sale. It’s been my experience that many lenders do not like to pay for HOA fees or any other miscellanious fees for that matter. With the homeowners unwilling or unable to pay for them, the burden falls on the buyer. This could mean thousands more dollars out of pocket from the buyer in order to continue with the Short Sale.

What this means to you

Short Sales can be great deals in this real estate market.
Get familiar with the process, do your research and be patient. I hope this brings a little perspective on the Short Sale process and that you will strongly consider the points mentioned when considering buying a Short Sale.