Short Sale Drawbacks For Buyers
- Time-consuming: A short sale usually takes longer than a traditional sale because of the lenders involvement. In an attempt to recoup as much money as possible, the primary lender and any junior lienholders involved will take their time negotiating and closing the deal. Remember, the more lienholders there are, the longer the process will take. Furthermore, there are times when the seller delays the sale because they either second-guess their decision or are unprepared with the necessary paperwork.
- Increased risk: Since short sales are sold as-is without typical disclosures, like a sellers disclosure, the condition of the home and the quality of the deal are not always clear to the buyer. Moreover, there is no guarantee that the deal will actually close, so the buyer may risk spending time and money on a home theyre unable to purchase in the end.
- More homework: A short sale requires the buyer to put in a lot more work upfront. Doing research to figure out the true value of the home, discovering all liens on the property and identifying any issues with the propertys condition are essential to determining whether the purchase is worthwhile.
- Property condition: Given the fact that short sale sellers are financially strapped, their properties tend to be in worse condition than average homes sold on the market. Therefore, the buyer often has to spend a lot more money on repairs and improvements.
Is Buying A Short Sale House A Good Idea
In a sellers market, buyers can struggle to find good deals on properties. This leads many people to seek alternative buying options. As such, people often ask me: Ryan, is buying a short sale house a good idea?
For investors, buying a short sale house can provide a great deal on a fix & flip property. But, they typically take an extremely long time to close. For primary residence buyers, most short sales are distressed properties. This means that many traditional lenders wont approve a mortgage for one.
In the following article, Ill dive into some more considerations of buying short sale houses. Specifically, Ill cover:
- What is a Short Sale Purchase?
- Primary Home: Is Buying a Short Sale House a Good Idea?
- Investment Property: Is Buying a Short Sale House a Good Idea?
- How to Find Short Sale Opportunities
Should I Sell My Home Through A Short Sale
Whether you should proceed with a short sale depends on your individual situation and whats likely to work best for you in the long run. If you cant afford your mortgage, and if home values have dropped in your area, you might not have much of a choice. A short sale might be able to help you preserve your credit to some degree by helping you avoid a foreclosure on your record.
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Short Sale Vs Foreclosure
A short sale is not the same as a foreclosure. In a foreclosure, the lender repossesses the property and then tries to sell it for enough to recover its costs. In a short sale, a lender accepts that it wont recover its outlay, and its considered the better option than dealing with the red tape involved with foreclosure and then going forward with handling a separate transaction.
Some Tips For Short Sale Buyers
Properties with a wide gap between fair market value and the outstanding mortgage balance are often your best bet. They’re short sale candidates because a foreclosure sale is not likely to generate enough funds to cover the mortgage. A lender is unlikely to spend the time and resources required to foreclose a home if there’s an opportunity to make more money through a short sale.
Your offer should closely align with the home’s fair market value and the more money you can put down, the better.
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Drawbacks Of A Short Sale
Despite the benefits involved, there are still quite a few drawbacks that come with short sales. The process is complex and drawn out, which can increase the riskiness of the transaction and negatively impact buyers, sellers and lenders financially.
Heres a list of some of the issues that both buyers and sellers face when involved in a short sale.
Contact Likeminded Real Estate Investors
The real estate industry, for all intents and purposes, is a people business. Truly successful investors have already realized the benefits of working with others in their field. After all, it takes two sides to complete a transaction. Why not do so in a manner that is conducive to your businesss success in the future? Having said that, like-minded investors are an excellent resource for just about anything you may need. Their knowledge of a particular area can be invaluable when locating a property for sale. Not only are they familiar with their respective area, but they may also have inventory that is waiting to be sold. Of particular importance, however, is the buyers list they may have on hand.
As its name suggests, a buyers list consists of people currently in the market to purchase a home. While the goal is to obtain a property, getting on this list is equally beneficial. In doing so, you will be in line to secure a property that meets your criteria. Essentially, they will be using their extensive resources to help you find short sales and foreclosures. In return, you are providing them with a means of wholesalingeveryone wins. However, not everyone will add you to his or her list. You need to find an agent and prove that you are worth their time.
Visit A Local Real Estate Investor Club Website
Visit Additional Websites
Post An Ad
Ask A Fellow Agent
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Repairs And Renovations Costs
These costs will vary depending on the propertys condition and your plans for it. It pays to put in the time and effort to develop a realistic budget, as this is one of the figures youll need to determine if the investment can make money.
Costs to consider include material, labor, permits, inspection fees, trash removal, storage costs, and dumpster rentals. A good inspection can alert you to any large expenses, such as a cracked foundation, faulty wiring, or extensive termite damage.
Here Is What Is Required To Complete A Short Sale:
- Your homes value is less than the balance remaining on the mortgage plus the fees involved with selling.
- You have an extenuating circumstance that puts you in a position where you either no longer can afford to pay your mortgage OR you no longer can stay in the home.
Here is what is not required to complete a short sale:
- You do not need to be in foreclosure.
- You do not need to be out of work.
- You do not need to be behind on mortgage payments.
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Who Should Buy A Short Sale Home
There are often challenges and delays when buying a short sale home which is why a disproportionate number of short sales are taken up by professional property developers and house-flippers.
These potential buyers are not emotionally invested in the transaction and can shrug off delays right up until they pay the purchase price and take possession. They may not care much even if the deal falls apart if they have multiple others in the pipeline.
Its different for individual home buyers who are looking for somewhere to live, because they could be in a sticky situation if the sale falls through.
Maybe youre well-situated to wait out a short sale, and these pitfalls wouldnt pose a challenge for you. But theres a good reason so many private buyers leave short sales to the pros.
Pros And Cons Of Buying A Short Sale Home
The biggest benefit to buying a short sale home is the chance of finding a great deal.
And unlike with a foreclosure, a short sale home is likely to be in good condition. Often, the current owner will be still in residence and keeping up basic maintenance. A foreclosure, by contrast, might be in disrepair.
Many challenges in the short sale process stem from one fact: the homeowner isnt making the decisions about the short sale transaction.
Its the mortgage lender that holds the home and supervises the sale. There could even be multiple lenders if the current owner has a second mortgage, such as a home equity loan or home equity line of credit .
Some home buyers choose to put up with short sale complications because they could buy at a bargain price. But you should be fully aware of the potential issues before considering a short sale purchase.
Short sale homes can be hard to find
In order to need a short sale, a homeowner must have negative equity meaning the homes mortgage balance is higher than the propertys value.
After the housing market collapse that started back in 2008, a lot of homeowners found themselves underwater on their mortgages. This meant a lot more homeowners qualified for short sales.
The situation has changed dramatically since then. Home values have bounced back and continue to grow in most markets. Now, with interest rates so low, more homeowners in trouble can afford to keep their homes by refinancing.
The short sale process can have long delays
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What Challenges Have Short Sales Presented For Realtors
The rapid increase in the number of short sales, and the short sales process itself present a number of challenges for REALTORS®. Major challenges include:
- Limited experience. Many REALTORS® are new to the short sales process a difficulty which is compounded by many lenders’ lack of sufficient and experienced staff to process short sales. Even if the REALTORS® are experienced, most servicers are under-staffed and still not adequately trained, making negotiating a short sale particularly difficult.
- Absence of a uniform process and application. Until HAFA guidelines were established, both short-sales documents and processes were lender-specific, making it very difficult and time-consuming for REALTORS® to become knowledgeable and efficient in facilitating these transactions.
- Multiple lenders. When more than one lender is involved, the negotiations are much more difficult. In the past, second lien holders held up the transaction to exert the largest possible payment, in exchange for releasing their lien, even though in foreclosure they will get nothing. This practice is less common today.
As a result of these challenges our members have reported difficulties with: unresponsive lenders lost documents that require multiple submissions, inaccurate or unrealistic home value assessments, and long processing delays, which cause buyers to walk away and harm distressed sellers.
The Short Sale Process
The short sale process is a lot like buying a home off the market.
Youll start by finding a house and getting pre-approved for financing . Then youll make an offer, negotiate the sale, and close.
But at any of these stages, there are unique challenges for short sale homes. Heres what you need to know.
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I Am A Real Estate Professional What Does This Mean For My Business
Though there have been many improvements, many members still reiterate that short sales continue to be delayed and servicers often hold unrealistic views of current home values. Often time the result is having a potential buyer cancel the contract and the property going into foreclosure. Enormous amounts of time are spent on potential short sales that result in foreclosures. Even if successful, the process usually takes many months and countless hours and often requires re-marketing because buyers lose patience and terminate the contract. Maintaining a focus on streamlining short sales will reduce the amount of time it takes to sell the property, improve the likelihood the transaction will close, and reduce the number of foreclosures. This will benefit the lender, the seller, the buyer, the community.
What Are Some Of The Drawbacks To Buying A Short Sale
Short sale homes are usually sold as-is. And lenders may not want to pay all the fees that are normally part of the sellers closing costs to save themselves some money because theyre already taking a loss.
The only reason youd want to buy a short sale is youre going to get a good price on it, says Wallace.
Plus, buying a short sale could seriously test your patience: The whole process could stretch a long time, because youre waiting for a response not from an individual, but from the bank or lender.
A short sale is short on money, but very long on time, Wallace explains Ive seen it take as long as a year. Youre going to be waiting a long time, and if you have your heart set on a property, you can be very disappointed.
Thats because even if the homeowner has approved the offer, the lender can come back six months later and say, No, we will not accept this price. So youre going to be waiting a long time and you might never get approval.
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Why Do Homeowners Choose To Do A Short Sale
For homeowners, short sales are generally preferable to foreclosures for multiple reasons. A short sale can be used as a tool to delay the foreclosure process if you are already behind on mortgage payments and/or your home is already in foreclosure. A short sale will give you some control over the process and time to find another home, while a foreclosure happens on the banks terms and ends with property seizure and eviction.
There is not any cost to complete a short sale, there is generally less impact on your credit , and there may be tax advantages to completing a short sale vs foreclosure. If successfully executed, a short sale can mitigate the financial fallout of an unfortunate situation.
In order for a short sale to take place, both the lender and the homeowner have to be willing to sell the house to the new buyer at a loss. The homeowner will make no profit , and the lender will lose money selling the house for less than the amount owed.
How Buying A Short Sale Home Works
With a short sale, you wont be able to simply purchase a home for a good price. Heres an overview on buying a short sale home:
- The lender must agree. First, the lender must agree to the short sale. For a regular home sale, the seller would use the proceeds to pay off the original loan. In a short sale, the home sells for less than the seller owes, so the lender wont get all their money back. As a result, the original lender must agree to the sale.
- The seller must prove they have no other option. The seller needs to show some sort of hardship. If they can prove that they cant keep making mortgage payments and will eventually default, the lender is more likely to agree, especially if the lender doesnt want to go through the foreclosure process and then sell the home on its own.
- A homes price must be in line with market value. In many cases, short sales go through because the market is faltering, and the homes value has dropped accordingly. The price the buyer is paying must usually be at market value.
- Short sales need to be disclosed. Finally, when a home is listed for less than whats owed on the mortgage, that must be disclosed upfront. Potential buyers should be aware that the sale price on the home is less than the mortgage balance, so theyll be responsible for negotiating with a lender, as well as dealing with the seller.
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How Long Does A Short Sale Take
A short sale can take as little as a few weeks or as long as several months. Because short sales are complicated transactions, they tend to be more time-consuming. Plus, the original lender needs to review the short sale offer to determine whether they will accept it. If the lender believes they can make more money by going through the foreclosure process, they might not accept the short sale proposal.
You can reduce the time it takes by working with a real estate agent that has experience with short sale transactions. A short sale is one real estate deal where you really need to get help from an experienced agent or attorney. Not all real estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training and a good track record. Having a real estate agent on your side who knows how short sales work and who has negotiated others will increase the chances of closing the deal.
Short Sale Drawbacks For Sellers
- No negotiation power: Although a seller plays an active role in the sale of the property, the lender is the only one with the power to negotiate the purchasing price of the home.
- Lack of profits: Since a seller owes money to the lender, they wont receive any of the proceeds of the sale of their home.
- A short sale can do real damage to a sellers credit score. The higher your credit score, the larger the hit itll However, short sales tend to cause sellers credit scores to drop by fewer points than foreclosures.
- Delay in obtaining another mortgage: After a short sale, a seller must complete a waiting period before qualifying for a new mortgage. Outside of an FHA loan, the waiting period may be anywhere from 2 7 years.
- Deficiency judgment: In some circumstances, the lender will sue the seller in an attempt to retrieve the remaining debt after the short sale. If a seller is sued, their credit score will receive a blow similar to a foreclosure. However, this process is not legal in all states.