We hear a lot about short sales these days. In the real estate biz we joke about the term, "SHORT SALE". "Short" sales should really be termed "LONG" sales since the process can take years! That's right, years! Kidding aside, the term "short" is used because the amount of money the lender who technically owns the house will receive ends up being less (SHORTer) than the orginal loan amount because of declining value.
This week's nightmare tells of a short sale that took over a year. The agent brought five (that's right! 5!) ready, willing and able buyers to the table with offers and although the offers met market value, the bank declined all five offers. Back to square one for those sellers! UGH!
I found this great list of short sale problems for buyers on Equifax.com. These warnings are for real folks. My best advice: work with a reputable advisor who knows the area. Frequently, short sales and foreclosures are listed with (way) out of town agencies who have a relationship with the bank. Find a local professional and GET BUYER REPRESENTATION. It doesn't cost you anything. You deserve to have someone on your side of the woods. It will probably still be frustrating, but it doesn't have to be so scary.
Short Sale - Buyer Beware
- Existing liens can kill the deal. When you buy a foreclosure, typically the lender has settled, or paid off, all existing liens attached to the property. You should be buying the foreclosed property lien-free. But a short sale property has not gone through the process of cleansing the liens from the title, so beware. You'll be asked to take title subject to the liens, meaning that you will now be responsible for them. So plan your budget accordingly and try to get everything paid off at the closing.
- Unknown liens can be expensive land mines. A bigger problem is the presence of unknown liens attached to a short sale title. An attorney recently shared a story about a short sale where a $45,000 tax lien cropped up after all the other issues had been worked out and the lender had accepted a price. This sudden $45,000 shortfall almost killed the deal. Ultimately, the lender accepted less, and the deal closed.
- More than one lender means double trouble. It's bad enough negotiating with one lender. But if the homeowner has taken out a second or third mortgage, you'll have a bunch of lenders standing in line, each of whom has to agree to the short sale.
- You might wait six months, only to find out your offer wasn't approved. Lenders don't appear to be in any hurry to accept a short sale offer. Why? Once the short sale offer is approved, the lender has to write off the missing principal as a loss. For a primary lender who might have some or most of the loan repaid, this might not be that big of a write-off. But a second or third lender will be left with nothing and have no incentive to approve the deal. Any of these lenders, or all of them, might kill your deal.
- You might have to pay more than you agreed or risk losing the deal. You might find out after months of working on the deal that one of the lenders requires more money to close. Everyone in the deal will look to the buyer for the cash. You have to decide what you're willing to spend to make the deal happen. At some point, the short sale might not be worth it.
- Unforeseen issues can crop up at any time and delay or kill the deal. The longer it takes to approve a short sale, the more issues can arise that will delay or kill the deal. If you're buying a short sale, you should absolutely hire your own attorney (not the lender's closing attorney), who can represent your interests in the deal and provide you with cover should you decide not to move forward with the purchase.
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