Are short sales a good choice for you as a buyer?
Post by : Sally Lawrence
Category: Home Buyers, Owning a Home, Real Estate Info
Are short sales a good choice for you as a buyer? Let’s answer that with another question. Are you planning to move, or are you planning to look?
Short sales occur when a seller’s lender agrees to take less money to satisfy the mortgage debt then the seller owes on the mortgage. That’s a pretty simple sentence that carries a huge amount of baggage with it!
Start with the word “occurs.” In order to get to that point, there has to be a willing buyer in contract with a willing seller, and the seller’s lender has to have approved the terms of the transaction. Once the seller’s lender has approved the sale, the sale is handled in a similar manner to a sale with a conventional seller.
So what’s it take to get to that point? First, the seller has to list the property for sale. Next a buyer makes an offer and negotiates a deal that the seller finds acceptable. Now the fun begins for the seller and his agent. To start the process, the seller gathers (at minimum) all these documents for his agent to submit to the seller’s lender:
- two months worth of all bank statements
- two months worth of pay stubs
- two years worth of tax returns
- a letter explaining why the seller deserves to have the short sale approved
- a full financial statement
- the lender’s application form
- the listing contract and all addenda
- the purchase contract and all addenda
- the lender’s purchase addenda
Doesn’t sound too bad so far from the buyer’s perspective, right? It’s not, although the documents submitted so far usually exceed 100 pages. Unfortunately, it is still not unusual to have to resubmit all or part of the package several times before the lender agrees they have received everything.
So as a buyer, you are probably aware that you are in for a fairly long wait to find out whether or not the lender will agree to a short sale on the house you fell in love with. Let’s take it one step farther and consider whether or not you want to be in a back up position on a short sale:
If your goal is to move, you should not consider any short sale that has an existing offer unless all other options have been exhausted. Making a backup offer on a short sale may be appropriate for someone who is buying it as an investment, or has absolutely no concern about whether or not they will ever be able to move.
Properties that are accepting back up offers are doing so in case the existing buyer, already under contract, is unable or unwilling to complete the transaction. There are a number of reasons why that may happen, but consider these as examples:
- The buyer completes their investigation and finds a problem they cannot live with …. say a foundation problem. It is unlikely that you would want a house that had a problem so severe someone else walked away from it after having already invested money in inspections.
- Keep in mind that in most cases, there will be no deficiencies repaired in a short sale transaction. Usually the seller does not have any money to do repairs and the seller’s lender is unwilling to spend money on repairs when they are already taking a loss on the loan.
- The buyer is unable to complete the transaction because the property appraisal value came in too low. Since you are also financing, it is likely that you would have the same issue. By this time, you would have spent money on inspections and the appraisal.
- Some other funding condition existed which the buyer was unable to meet. This is about the only circumstance in which you are unlikely to have the same problem.
The seller and listing agent want backup offers in place because it’s good for them to be ready with another buyer when their deal falls apart. The four properties above that are already in contract with a buyer are in the status called Active 3PA. This means that the buyer and seller have signed the contracts, but they are waiting for the sellers’ lender to approve the short sale.
To give you an idea of the time involved in the lender approval phase, I have two short sales listed right now that had buyer and seller contracts in place less than one week after they were listed. We are still trying to get short sale approval from the lender — SIX MONTHS LATER — so that we can open escrow and (hopefully) complete the transaction. If you were one of those buyers, and we made that offer today, in the best case you would be getting close to moving in seven and a half months. Is that situation acceptable to you?
So, back to the beginning question, do you want to look at houses, or do you want to move?