What ever happened to the days when a homeowner who just wanted to sell his home found a willing buyer and, after several negotiations, the home sold? The economy, silly. The real estate market’s tumble into the ashes flooded the market with “distressed properties” – a sweet euphemism for homes that the owners could no longer afford.
While the short sale transaction has been around as long as mortgages have, the sheer volume of them during the most recent recession familiarized the average American with the concept. Caught unaware, both lenders and real estate professionals scrambled to find their places in the process, with many becoming overnight experts. Several myths became firmly rooted in our consciousness and scams and cons abounded.
Sellers typically agree to short sell a house as a way to avoid foreclosure. This is because they’ve bought into the myth that a foreclosure is worse on their credit than a short sale. In reality, the Fair Isaac Corporation treats a short sale and a foreclosure the same when determining your FICO® score.
Buyers, on the other hand, have been inundated with news stories about deeply discounted prices for short sale properties – so much so that some buyers insist on being shown short sales instead of traditionally listed properties.
Lenders love short sales. The homes tend to sell for more than foreclosed homes, and the borrower remains in the home, caring for it, showing it to potential buyers, hiring the real estate agent and, basically, doing the lender’s job.
Real estate agents love short sales because they have a better shot at getting the listing than they do if a house is bank-owned. Is it any wonder then, that the myth of a short sale being better for both buyer and seller is so pervasive?
If you’ve decided you absolutely must pursue a short sale home, let’s take a look at the basics of buying a short sale.
Buying a Short Sale: Take it One Step at a Time
Step One – The Short Sale Real Estate Agent
The first step to take is to find a knowledgeable real estate agent. Yes, it may be a bit of a challenge, but short sales are quite different than standard purchases, and you need someone experienced and well-versed in the short sale process. Let the newbie agent find someone else to practice on. To find this super agent, ask friends, colleagues and neighbors who they recommend. Look at short sale homes currently on the market and pay close attention to any agent names that pop up repeatedly.
Step Two – Financing
Next, put the agent to work finding you a short sale property according to the criteria you have determined works best for you. While he’s doing that, concentrate on getting a loan. Visit lenders to find the best rates and terms. Although short sales are notoriously slow, once your offer is approved by the seller’s lender the pace may pick up, and you want to be ready to close when it does.
Step Three – Determine Market Value
Never assume that just because a house is listed as a short sale, it’s bargain-priced. When you find a house that you are interested in, have your agent compile a comparative market analysis (CMA) to determine its market value. Often, its value doesn’t match the asking price, so a CMA gives you a basis from which to determine how much to offer on the house.
Step Four – The Safety Net
Ensure that your agent includes language in the offer that allows you an out under certain circumstances. Some of these include finding another home or a home inspection that turns up needed and costly repairs. Lenders typically won’t negotiate the price because of considerable problems with the house. It’s imperative you are able to walk away from the deal when faced with huge problems with the home.
Step Five – Continue Your Short Sale Search
Keep looking at houses. There is absolutely no guarantee that the lender will accept your offer or that the sale will conclude successfully. If you find another home that you like, that is easier to purchase, you may want to walk away from the short sale.
It seems as if everyone involved with the short sale, from the homeowner to the listing broker to the lender, wants you to believe that the short sale is the very best bargain opportunity of a homebuyer’s lifetime. The reality may be quite different, depending on region. In Las Vegas, for instance, the prices of short sale houses average $2,500 more than the median price of other homes on the market. Foreclosures are the bargain in Sin City. The lesson here? Don’t buy into the media’s hype. Do your homework and pay close attention to research pertinent to your specific region.
Short sales do offer the chance to purchase a home at a discount, but buyers should proceed with caution. It’s a long process, full of pitfalls. Going into it with a savvy agent, and your eyes wide open, puts you a step ahead of the game.