Buying a Short-Sale - Here are a few things you should know.
What is a short-sale? In a short-sale the home owner is requesting his mortgage lender to accept less than the balance on
the mortgage as payment in full.
For example, a home owner bought a house for $200,000 in 2006 with $180,000 mortgage on it. The balance on the mortgage as of today is $175,000. The value of the house declined in recent years to $75,000. The house is offered for $75,000 as a short-sale. The lender accepts to receive $75,000 (minus $8000 transaction cost= $67,000) and let’s the homeowner off the hook for the difference between the loan balance of $175,000 and the sales proceeds of $67,000.
Why would a lender do that? The answer is, that Arizona, and many other States, have anti deficiency laws that protect the home-owner from paying back the mortgage after a foreclosure. Some attorneys think that short-sales are not automatically protected by the anti-deficiency laws and that homeowners should negotiate with lenders to get it in writing that the lender will not go after them for the deficiency.
In Arizona, there are scenarios where the homeowner is not protected by the Arizona Anti-Deficiency Law. Often non-purchase money is involved. In some of those cases a short sale agreement can come with a substantial reduction of mortgage debt and even wipe it out. For the buyer in this short-sale transaction, it can mean that the short-sale takes a long time. When buying a short-sale all these aspects need to be considered. Especially primary residents will think of leases they are in, children in school, job situations and so on.
When you are buying a short-sale you benefit from a real estate agent that has represented sellers in short-sale transactions before. Buyers should look at each situation individually before making an offer on a property. About half the listings require an earnest money deposit for 3 to 6 months. In addition, there is a reasonable sense of obligation for many buyers because they realize that the seller’s financial future is on the line. When a buyer pulls out of a transaction it can potentially lead to the property going into foreclosure. However, having said that, there are situations where less commitment by the buyer is ok with the seller.
Buyers should not get too excited about list-prices on short-sales. Often the list-price on a short-sale is much lower than comparable properties sell for. In a short-sale situation, the price of the listing is approved by the seller only. In a short-sale the seller has no benefit from the property selling at a higher price. Eventually, the lender will have to take the loss on the mortgage and is therefore interested in getting the house sold for as much as possible. The lender will order an appraisal and negotiate with the buyer. The appraisals are not always correct and that can work for or against the buyer.
There are different reasons why many short-sales are priced below fair market value. The listing agent may have gotten the value estimate wrong. Sometimes agents want to attract an offer quickly to get a foreclosure date postponed. They look for a new buyer once the lender indicated at what price a deal could be approved.
Lender owned properties and often short-sales sell “As-Is”. "As-Is" means that the buyer cannot force the seller (seller's lender) to do repairs on the house. Sellers usually don't agree to do any repairs but there are sometimes exceptions.
What we frequently see in this market is that the seller in a short-sale refuses to provide a Seller Property Disclosure Statement known as SPDS. The refusal to provide SPDS is common practice with lender owned properties and makes some sense since the lender just got the property and usually will not know much about it. For some reason it became common for short-sales too to refuse the SPDS. I recommend buyers negotiate to receive this disclosure form from if the seller has actually lived in the property.
A short-sale transaction requires a lot of patience and some effort from everyone involved. The buyer may have to wait anywhere from 4 weeks to 6 months and sometimes even longer, to get a short-sale approved. Sometimes it's not possible to negotiate a short-sale and the property goes to foreclosure. Many times the seller’s lender will request money on top of the sales price from the seller in order to approve a deal. If the seller does not have the funds, the seller’s lender may say, that the buyer can pay for the seller. Often times buyers accept to pay an additional $2000 or more to get this deal approved.
Especially, when a buyer really wants a particular home badly, the disappointment can be huge. Buyers sometimes get frustrated by the short-sale process and end up buying a lender owned property or a traditional sale. Lender owned properties are usually readily available. Lender owned properties have been foreclosed on and are now owned by the lender.
In a market characterized by distressed properties, buyers benefit from an agent with experience with short-sales and lender owned properties. A realtor can advise a buyer if a particular short-sale has a reasonable chance to close and what the risks are, for example an upcoming foreclosure date, several liens on the property, an uncooperative renter, just to name a few. As a realtor, I provide information to my clients so that they can make
informed decisions.
Opportunities are plentiful, the interest rates are incredible and with an experienced Realtor at your side your dream home will become a reality.
