Charlottesville is currently seeing a handful of short sales, and for every short sale that we can successfully achieve, we are avoiding a foreclosure hitting our market. Short sales, however, are not for the faint of heart! They are highly unpredictable, and while they can result in an incredible deal on a home, they can also result in frustration and confusion. Here are a few tips and warnings for anyone who is considering making an offer on a short sale.
SHORT – SALE DEFINED: The term “short sale” is used to describe a sale where the debt owing against a property combined with the costs associated with the sale exceed the property’s market value. In a loan default situation (pre-foreclosure) creditor(s) may be willing to agree to allow the property to be sold for less than the loan amount and/or accept less than (or “short”) the amount owed, and may or may not accept the net proceeds of sale as payment in full of the debt.
The sales contract will be between YOU (the Purchaser) and the SELLER, not the LENDER. The sales contract will then have a contingency in it that states that the LENDER must approve the agreement and that allows the SELLER a chance to open this dialogue with the LENDER.
- Timing is everything! A short sale can take up to 6 months to be approved by a bank. If you are a first time buyer looking to take advantage of the 2009 First TIme Home Buyer Tax Credit, I do not recommend looking at short sales. There is no way to predict whether or not a short sale will close in alignment with any sort of deadline. If you absolutely need to close and be in your home by a certain date, a short sale is probably not for you.
- What you offer on the home and what a SELLER may agree to and ratify into a contract MAY NOT be the sales price. The LENDER still has to approve any agreement that is made in a short sale, so don’t get your hopes up about the sales price that you’ve agreed upon with the SELLER. The LENDER may counter-offer and ask you to pay a completely different, higher price. The price that the LENDER is willing to take is going to be determined through the help of a third-party broker, who will do a BPO (Brokers Price Opinion) on the home, and who will recommend a value for the home based on recent comparable sold homes.
- It is recommended that you do your inspections immediately. The PURCHASER will need to take on some risk of lost investment on items like a home inspection or an appraisal. Once the SELLER and PURCHASER have a ratified contract, it is recommended that the PURCHASER go ahead and conduct the home inspection. This inspection will likely be for information only, as the SELLER likely cannot make repairs, and the LENDER likely will not. It is possible that the PURCHASER will spend money on a home inspection only to find out that the LENDER does not approve the sales price and the contract may fall apart, with the PURCHASER being out the cost of a home inspection.
- Once the LENDER approves the short sale, they will likely require the PURCHASER to close immediately. The lender will often request closing to occur within 7-14 days, so the PURCHASER needs to have their finances in line by then.
- During all of this, the home is still in pre-foreclosure and CAN progress to foreclosure. A ratified contract on a home does not necessarily stop the foreclosure process from occurring, as sometimes the short sale department (loss mitigation) does not have contact with the foreclosure department, and foreclosure proceedings may begin. If a home does progress all the way to a foreclosure sale, the contract between the PURCHASER and the SELLER becomes void.
All of these items can make purchasing a short sale a very lengthy and sometimes confusing process. Please make sure that you are in a position to purchase a home under all of these conditions before you begin to seek out short sales.
For those of you who DO have the flexibility to purchase under these conditions- happy hunting, and congratulations on the great deals you may be able to find out there!