A Short Sales Primer: For Buyers

Today I’m hoping to help those of you who are interested in buying a home that is a short sale.

Short sale (real estate) – the lender allows a property to be sold for less than the amount owed on a mortgage and takes a loss.

As a buyer, a short sale can be a great opportunity to purchase a home at around 5-15% below current market value. In areas of rapidly declining home values, this means nothing. In the Coeur d’Alene area where real estate prices are not declining as quickly as the rest of the country (although they are at a solid decline right now), this is a great way to have ‘instant equity’ in a property.

So what’s the downside? It’s a lengthy process that is not guaranteed. First of all, when making an offer, it is important that your offer allow at least 90 days for the banks to review and approve (or deny) the offer. I often hear surprise in Buyer’s Agents voices when I tell them this. There is a common misunderstanding that the banks are quick to react and respond. This is not an REO property (where the bank owns the home), but rather the home is owned by the seller and the bank simply has to determine if it is in their financial best interest to accept a short-sale or to proceed with foreclosure.

After your offer has been approved, you absolutely must be fully prepared to do an extremely fast closing, should the bank desire this. In one case, the bank took exactly 30 days to approve the offer but then responded that they wanted it closed in just 14 calendar days.

Next, when purchasing a short-sale, do a lot of due-diligence. This means run a full title report on the property to determine if there are any additional liens on the property (including mechanics liens, tax liens, utility liens, etc). The last thing you want to do is enter into a binding agreement to purchase (or go through the purchase), only to find out there are other debts outstanding on the property. Not a great situation to be in.

Here is something else to consider: When you are considering a short-sale home, find out as much as you can about the loans on the property. Is there one mortgage, two mortgages, three mortgages, more? The more mortgages there are, the less likely that a short-sale will be successful. This information helps you determine whether you should spend your time on it or not. Additionally, it can help to know the full balance of all of the mortgages. The key here is the first mortgage. As an example, we did a short sale in which the market value of the home was $165,000 and the combined outstanding balance on two mortgages was $195,000. Agents would call and ask us and then assume that the short-sale would be impossible. The key element they were missing was the balance on the first mortgage. It didn’t matter what the 2nd balance was in this case, nor is it likely to matter in any other case. The 1st mortgage will negotiate a payoff with the 2nd mortgage no matter how high the 2nd mortgage balance is. Usually this is a very small amount (between $1,000 and $3,000). The 1st mortgage balance due was $155,000, making the short-sale a success as the 1st received 92% of the loan balance and the 2nd agreed to a small pay off amount.

Finally, it is absolutely imperative that you are working with a Buyer’s Agent that knows what they are doing. Unfortunately, not too many fully understand short sales. Additionally, your Buyer’s Agent should also have a strong knowledge of the Seller’s Agent that represents the sellers/bank in the property you are interested in purchasing. Here’s where the problem lies because most agents simply do not understand short-sales and there really isn’t a way to ‘quiz/interview’ to determine their knowledge, unless you are an expert in short-sales yourself.  And be very wary of agents with a so called “designation” saying they are “experts” in foreclosures and short sales.  They sat in a class, taught by someone who doesn’t sell foreclosures or short sales, an educator, a trainer.  Teaching theory in a realm where there are no absolutes.

Although our ‘niche’ is not short-sales, we’ve definitely learned a lot over the last few years about short-sales in the Coeur d’Alene area. If you are interested in buying a short sale or selling your home and must use a short-sale, give us a call. We can talk, see the options for you and advise you from there.

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