In my last post, I talked about some of the pitfalls of dealing with a short sale as a Seller. Today, I'm going to talk about short sales from a buyer's perspective. I'm going to be a bit repetetive, so bear with me for a second.
Let's start off by defining what a short sale IS. A short sale by the most basic definition is when: The net proceeds from the sale of a home are not enough to satisfy the underlying liens (mortgages) on the property AND the seller does not have the means to pay the difference between the net and the amount owed. Take this example, a home is listed for sale for $200,000. They receive a full price offer and after selling expenses NET $182,000. The seller only has one mortgage but the mortgage on the property is $190,000. There is a difference between the net proceeds and the mortgage amount of $8,000. Is this a short sale? ONLY if the seller cannot bring the difference ($8,000) to the closing table. If the seller does not have the money to bring to closing to close the sale, they yes, we are in a short sale situation. Clear? As Mud?
As a buyer, your agent will show you many homes. Some you'll like, some you'll hate and some you'll LOVE! The ones you love typically have all or most of the things you're looking for. Number of bedrooms and bathrooms. Large enough, correct yard size, fixtures, location, location, location. Unfortunately, we're often attracted to homes we can't afford. But a phenomenon has taken place of late in that the homes we really love have started to become affordable! But there's a catch. Many of these homes are affordable because the seller is selling them "short". The price on the sticker is not necessarily the price you'll pay. WHAT?! Isn't that illegal? I thought if they advertised it at a certain price, they had to sell it for that price?! In a normal sales situation, assuming the seller has equity in their home, if they advertise it at a certain price and terms and a ready, willing and able buyer offers that price and terms, then yes, they have to sell it for that. But in a short sale situation, there is a little clause in the listing agreement that says "All terms subject to underlying lien holder's approval". Those Dirty Good For Nothin' Rotten Scoundrels! You knew there would be a catch didnt' you?
You see, in many cases with all the competing inventory out there, a short sale seller has to price the home well below market value to even attract a buyer. Because of all the pitfalls that are associated with short sales, many buyers and even a number of agents are scared to jump in worried they're not going to get the home. At the very least, a short sale home will add one month to the process (the quickest I've ever seen a bank give approval was 3 weeks) and it could add 6 months to the process. Many buyers are not willing to wait that long. In 6 months, there are too many unknowns. Will the housing market decline further? Will prices start to rise? If prices start to rise and I don't get this home, will I be able to even afford a home? If prices decline further, am I overpaying for the home? What will my interest rate be in 6 months? Will that interest rate be high enough that I don't even qualify for this home any more?
Q: So why would a buyer want to pursue a short sale?
A: If this happens to be the perfect home at the perfect price, then the buyer can get a VERY good deal on a home that they maybe couldn't afford to purchase otherwise.
Q: Will my offer even be approved and if not, then what?A: There is no guarantee your offer to the bank will be approved. And if it's not, then you're back to looking for homes again.
Q: Can anything else happen while my offer is in?
A: Believe it or not, you can put an offer on a home and the bank can still foreclose on the home before they even review your offer. Amazingly, the short sale department and the foreclosure department often don't talk with one another. So while the SS department can be negotiating a short sale and be close to approving it, the foreclosure department can go ahead and foreclose. Now the buyer is out of a home and the seller is too.
Q: So it sounds like Short Sales are all negative, what's the benefit?
A: For a buyer, the benefit can be huge. If the short sale ends up getting approved, the buyer may acquire title to a home for 10's if not 100's of thousands less than what that home would appraise for. For a seller, they may be relieved of all or a portion of their mortgage debt, creating a huge relief for them.
When you go out to look at homes, consider these questions:
- How soon do I need to be in my new home?
- Do I want to focus on price alone, or do I want the home of my dreams?
- Am I patient enough to wait up to 6 months to get an answer? And am I OK if that answer is "no"?
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