Tips for Buying a Short Sale Property
This is a guest post by Emma Martin who writes for J.G. Wentworth, a settlement funding company and purchaser of future payments to individuals who hold assets in the form of structured settlements and annuities.
With so many homeowners trying to sell their properties before they get foreclosed on, buyers can find a lot of great deals on houses headed for default. Such transactions not only remove the financial burden from the previous owners, they also allow buyers to avoid some of the entanglements of a foreclosed property – e.g., a redemption period or the possibility that the previous owners will gut the home.
In short, a short sale is preferable to a foreclosure – even though you may pay a bit more than you would at auction. Here are a few tips for finding the best deals when you opt to purchase a short sale property.
1. Use a realtor
Although a short sale can seem like a screaming deal, there may be reasons that you don’t want to buy. A real estate agent can uncover this information for you. For example, they can find out if the property is going into foreclosure, or if the short sale is just a maneuver designed to help the owner sell.
You also need to know if there is a second mortgage on the home since, even if the homeowner and the original lender sign off on the sale, you may have to deal with the secondary lender as well. It pays to make sure your agent has experience with short sales to ensure that you don’t get the short end of the stick.
2. Don’t buy “as is”
Many homeowners offering short sales do so with an “as is” caveat. Don’t buy into a situation where damage and pre-existing problems become your sole responsibility, as your “cheap” property could be turn into a money pit.
Banks can often get away with this because they can afford to hold out, but homeowners desperate to sell (and recoup some of their costs) are more liable to give in to your demands if they don’t have other buyers on the hook. At the very least, you shouldn’t purchase a property if the seller won’t let you have it inspected.
3. Be prepared to wait
Buying a home that is close to foreclosure in a market in which home values have dropped significantly is not as easy as you might think. For starters, even if the homeowner accepts your bid, the bank that holds title may not. This could lead to weeks or months of negotiation before you come to common ground.
4. Never give cash
Any seller who asks you for cash or other payment up front is committing fraud. Since a short sale means that you are buying the house for less than what is owed to the bank, the homeowner will come out of the deal with no money. If demands for payment seem fishy, they probably are, so don’t fall prey to this common scheme.
5. Deal with the lender
Once the homeowner agrees to your purchase price and signs off on it, all further dealings will be conducted with the lender. They will also have to approve the terms of your offer and then you will pay them, not the homeowner, for title to the property.
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January 12th, 2011 at 11:26 am
I would say the biggest thing with a SS is to not get emotionally invested. Because you could love the house and wait and wait only to get the carpet pulled out from under the deal. Speaking from personal experience. SS can be nothing but a huge headache and often are not that great of a deal. REOs are much better deals and are like a normal sale in terms of the time period.
January 12th, 2011 at 12:30 pm
We just closed on a SS last week, but we’ve done offers on half a dozen. I would say the most important things are to get a buyers agent with LOTS of SS experience, and be prepared to wait and wait and wait.
If you are renting, and this is going to be your first home, just accept that you won’t be able to give your 30 day notice until you have the keys in hand. We actually went to closing on one SS and still had the deal fall through because the second mortgage holder backed out. I wouldn’t bother with any property that has two lien-holders. The second one will get next to nothing out of the deal, so they have little incentive to sign off.
We placed our offer in August 2010 and just closed last week. I believe that is a typical time frame for short sales.
If you have the time and patience to wait, you can get a screaming deal. If you are AT ALL in a hurry, or need a home by a certain date, they are not a good choice.
January 12th, 2011 at 1:59 pm
I bought my first condo as a short sale but the difference was covered by the government through the HAP program. The owner of the condo was injured in Iraq so the gov. covered the difference for him when selling.
Now that I am in my condo, I am saving up as much as I can, and want to get approved for a second load in the next year or two to buy another property and rent it out. I am interested in looking at short sales since I have time to wait and a place to live. Has anyone done anything like this or have experience with this?
January 13th, 2011 at 1:18 pm
My first Real Estate purchase was a Short Sale, and this is something I wrote up about it for redfin.com in regards to my experience, and hope for others looking at Short Sales. Note, this was in 2009 where fewer banks were actually going through with short sales. Banks seem much more open to short sales now:
******** start story *********
I thought I’d shed some light on how my process went, and what you can possibly expect.
Initial Offer – March 25th (Listed 300k, offer 265k (3% from seller))
To talk a little about our initial offer. The house was listed as Contingent (Show) and I found the house on rtrustee.com as a listed trustee sale. We were out looking at a house near the same street and I asked my Realtor if he’d be willing to let us see it so we knew what the model looked like. After looking it up and seeing that it was Contingent (Show).. he said that was fine. We loved the house, so asked if we could put in an offer (he explained to us that it was already contingent but would call the selling agent to see how serious the deal was). The seller agent said it was a solid deal, but that he’d accept a backup offer in-case of any issues.
On April 9th our Realtor received a call from the selling agent notifying him that the buyer backed out because the process was taking too long. He explained to us that Short Sales were hit or miss and that he wants us to have the house we want, but to not give our hopes up too quickly.
April 10th we were notified that the seller accepted the offer and was going to pass the offer onto the bank (then come the delays).
Mid / Late April – The selling agent is telling us that the short sale negotiator is talking to the investors and trying to get everyone to agree and get the deal going (Man.. this sounds like a quick process .. i might be in my short sale home sooner then I thought).
Mid May – Much like above.. we’re told that the Short Sale negotiator is working with the banks and that they are confident the deal will be approved.
The house comes on and off the market as Contingent a few times during this process (guessing the listing expired). Selling agent verifies with us, that we’re still interested in the house and that he’s sorry the banks are taking so long.. (he’s had the house for nearly 10 months at this point).
Early June comes – Sellers agent says he has some backup offers, but is still going through with our deal and thanks us for being so patient, and that he just wants us to hold off a bit longer as he’s being told that a deal will be made.
Mid June – Much of the same.. although my patience is wearing thin..
June 26th – Receive APPROVAL from the bank.. (via a sent addendum).. Closing is scheduled for the end of July, and it feels like we’re really on our way.. Realtor asks us to wait on scheduling inspections etc until we get written approval on a bank letter head. My lender is also waiting for the written approval before going ahead with appraisal.. (We opened up Escrow the following Monday).
July 15th comes along – We hear nothing from the bank, seller agent isn’t getting responses and just being told to “hold tight”.
July 28th – bank comes back and says their appraisal doesn’t meet their guidelines as we’re under 85% of the banks net (bank is net’ing less then 85% of the appraisal value). Asks if we can increase offer by 5k. We comply, and also add that our appraisal must meet this also, which after all it turned out it did).
August 3rd – We get written approval on Bank Letterhead along with modified addendum.
Early August – All inspections look great
Mid August – Final Walk-through shows that someone stole the PG&E Digital meter.. We get this take care of, and move on..
August 21st – I get the keys.. (really only took 21 days to close after the bank gave us the letter head approval).
I’m now moved in (need to unpack) and couldn’t be happier (as this was the 1 house we really loved, and we weren’t in a purchase to buy, so waiting was an option).
We bought the house for 400k cheaper then it’s 2005 sale price (when it was new), and we actually paid a bit lower then the appraised value (so I have some built in losses I can endure from the next market downturn which I think is on the cups of happening).
So very happy as a first time home buyer to have the patience it took to get a house at a great value, and in great condition (hell, it even had blinds).
******** end story *********
I’m in contract for my first income property now
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