5 Cautions for buyers about short sales

Portions of this post taken from an article written by Amy Hoak, a MarketWatch reporter based in Chicago for the Wall Street Journal. In a short sale, a homeowner's lender agrees to accept less than is owed on the mortgage for the property. It's a useful alternative for borrowers underwater on their mortgage and on their way to foreclosure. As home prices continue to decline, short sales have become a viable option for those who need to sell.

A short sale can also be attractive to a home buyer since the lender will often accept bids on the property that can be 10% or more below the market value, determined by the prices of comparable, nearby properties. Although the mortgage balance is probably greater than the price a seller could expect in a traditional sale, the lender may be willing to take less than it's owed in a short sale if it can avoid the further expenses of foreclosing and taking over the property. The savings, however, often come at the expense of a home buyer's time. Of the short sales that I’ve done, in only one case did we get an answer from the bank in less than a month. In a couple of offers the buyer “timed out” and gave up after three months of waiting. It can be frustrating.

Are the savings worth it to you? Consider these five caveats before shopping for a short sale:
1. You'll wait in the dark
Perhaps just as frustrating as the wait time is the fact that you likely won't be privy to details as the deal is progressing. That could mean going months without an update. Initially it was because banks were overwhelmed and understaffed. But as they have ramped up staffs the reasons for the delays have shifted, The lender could be considering multiple offers. If the seller had both a first and second mortgage, that could also make the process more complicated, since negotiations may have to take place with both. The homeowner also has to prove their financial hardship to the lender. Some agents working for homeowners do better jobs than others of getting the right documentation together to send to the bank to justify the short sale. In the end, the approval process may also involve multiple layers of bank management, each with its own committees and reviews that take time. Of course the buyers see none of the hassles that are going on between the bank and the homeowner or behind the scenes at the bank they just see unending delays and get no explanations.

2. Banks will make you a deal, but within reason
There are deals to be found in short sales -- but don't expect outright steals. A buyer needs to make a fair offer, based on comparable homes that have been sold recently. The offer should be aggressive, but not ridiculous. The biggest mistake that I see with both short sales and foreclosure sales is the tendency of buyer to low-ball the bank, thinking that they just want to dump the property. It’s just not going to happen. In fact, if the bank has already factored in its loss to the price the winner will be the bidder who goes slightly above the asking price. My advice is to listen to your Realtor’s advice on price.

3. Sales are 'as is'
In a short sale, it isn't likely that you will get allowances from the seller for repairs that are needed, as you might in a traditional sale. You absolutely must do a thorough home inspection and know what you're getting into, but remember that your bid is for the property "as is." You need to factor into your offer the cost of the needed repairs. Neither the seller nor the bank is going to pay for repairs. Fortunately we are out of the really bad winter season when doing a good inspection was almost impossible.

4. Have a back-up plan
Even if you decide to bid on a short-sale property, it might be best to keep looking anyway. It isn't uncommon for people to find a home they like better and cancel the short-sale deal. You can do that if the bank has not already accepted your offer. Just make sure that you get an acknowledgement of the offer cancellation in writing from the other agent. That said, when a offer is accepted and earnest money is put down, remember that you risk losing those funds if you decide to walk away and buy another home. You have few outs once the offer is accepted. It may take months before the deal closes, even after the offer is accepted. One consequence of the long wait times is that it is hard to lock-down a mortgage rate and commitment that won’t expire before you can get to closing.

5. It's not only about price
Unless you are an investor, it is important not lose sight of the fact that you're buying a house to live in. Buy a house you like, not just a house that you got a great deal on. Compare the short sale house to others that you have seen with similar features than may not be short sales. A short sale is only a bargain if it's a home that you truly want to live in -- not something you're drawn to only because of its low price tag. And if you are considering buying a house that you know up front you’re going to want to extensively remodel, factor that into your thinking and bidding too. Getting a great deal on a house that you need to immediately put $50-100K into to “get it right” may not really make sense.

Short sales aren't all long, drawn out affairs. It really depends upon the bank involved. Some banks are so well managed in their short sale process that you can get an answer in a day or two and some are so bad that Realtors will try to avoid having to deal with them because they know it will be a 2-3 month ordeal. Local Realtors usually know and can tell you, which banks or lenders are the worst to work with on short sales and foreclosures. Short sales also have the advantage that the home is usually still occupied during the process, so there is less likelihood that vandalism will occur.