Don’t Let Your Clients Come Up “Short”

A short sale is when a lender agrees to allow a mortgaged property to be sold for less than what is owed on the mortgage.  Short sales bring many advantages to the table that foreclosures do not. Attractive selling prices, better conditions, access to information about the home are just a few worth mentioning.  When counseling your transferees on the purchase of a short sale property it’s also  important to go over the pitfalls of entering into a short sale sale agreement with a seller.  This could save him/her a tremendous amount of time and aggravation.

  • The price you see advertised, in many cases, has not been approved by the seller’s lender…meaning that you may never be able to buy the house at the advertised price.
  • In a short sale the transaction normally needs to be approved by a “third party”—the bank. If they decide to accept less money they are actually embracing the loss of capital for its company and share holders. This is not something that happens easily.  Many never get approved & end up at the foreclosure auction & then usually go back to the bank.
  • One of the first questions your transferee should ask is whether there are two mortgages on the house.  Every third party entity that has a financial stake in the house has to agree to the short sale. If the sales price of the home won’t pay off the second mortgage, that lien holder may not get paid and can block the sale.

  • It takes upwards of 6 months to get an approval from the seller’s lender…if one ever comes at all.  I’ve spoken to many agents that have submitted offers and have either heard nothing back from the bank or are asked to resubmit paperwork many times over.  Delays in closing can mean extended stays in temporary living and possible expiration of relocation benefits since most have a 12 month window for use.
  • In most cases, multiple offers from different buyers are submitted for approval,  which usually means the price will inflate and you may end up paying more than you initially planned to. If there are multiple buyers interested in the purchase of the property, banks are less apt to consider lower offers and more inclined to induce a bidding activity between the parties.
  • The last item to consider is deferred maintenance.  Since the former owner did not have the funds to keep their home it is safe to say that a lot of maintenance was deferred.  Be sure to have the property thoroughly inspected prior to purchasing and if you must move in quickly after closing be prepared to live among contractors for a while.

There are tremendous deals to be had with short sales but it’s important to know what the process is and to know that purchasing a short sale property requires a tremendous level of patience. Given how long it will probably take the bank to reply to your offer, you should counsel your transferees to keep looking at other houses while they wait for a response, and to proceed with the purchase of another property if one is found.  Have the destination services agent write the short sale purchase agreement in such a way that will retain this flexibility.

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