Short selling is complicated and slow transactions for both the buyer and the seller. It can take weeks or months for a lender to approve a short sale, and many buyers who submit an offer end up canceling because the process takes too long. Buying a short sale can be a great opportunity to get a property at a reduced price, but it can also have its drawbacks. Buying a short sale is a more complicated process than selling a typical home, so there are some unique risks when investing in these types of investment properties.
Learn the seven risks of a short sale so you can plan properly and decide if it might be the right investment for you. However, a short sale can prevent foreclosure and its negative impact on your credit. A short sale is less harmful than a foreclosure, as long as the landlord can persuade the lender to report the debt to the credit bureaus as “fully paid.”. For starters, most of the homes you find listed as short selling haven't been approved by the bank as short selling.
Instead, the owner or his representative is trying to request multiple competitive offers by advertising the house at a lower price. So, even if it's easy to find short sales in your local newspaper or with a real estate agent who specializes in selling them, it's much easier to get your hopes up about buying a home at a price the bank will never accept. Real estate markets are flooded with short selling and, according to the National Association of Realtors, that number is only expected to increase in the near future. So, if you're looking for a new home, there's a good chance you'll fall in love with a house listed for short sale.
If you're thinking of bidding on a short sale, here's some basic information you should know. WHAT IS A SHORT SALE? A short sale is a real estate transaction in which the owner's lender or lenders agree to accept a purchase offer from a new buyer, below what the original owner owes. In a short sale, the seller's agent puts the property up for sale and picks up the seller's “hardship” package, which includes bank statements, information about the loan and a letter of difficult living conditions explaining why he had to make a short sale. Then, when you, as the buyer, submit an offer to buy a short sale, the agent presents that offer, along with the hardship package, to the lenders and begins the negotiation process.
One of the biggest challenges is getting multiple lenders involved in short selling. Even though junior lien holders would be annihilated if the home were foreclosed, they often require monetary contributions to release the lien. This can also lengthen the negotiation process. You've probably heard horror stories of buyers waiting six months or more to find out if their short sale offer is accepted and then receive a counteroffer at a much higher price than they can afford.
While a few lenders can accept short selling offers in a month or two, acceptance usually takes four to six months, or even longer. And when there are junior lien holders, everyone will normally have their own pricing opinion (BPO) of the broker on the property before accepting the offer. When viewing properties, find out if short sales have been “approved” or not. Approved short sales are those where the lender has already agreed to take a specific price.
Short sales that haven't been approved yet are the ones that take the longest. Good communication from your agent can make this period of anxiety pass more quickly. Don't forget that just because you have a pending offer for a short sale doesn't mean you have to stop looking for homes. Is it possible to save money by buying a short sale? However, not all short selling is automatically a deal.
Make sure your agent provides you with recent comparable data (statistics on active, pending and, most importantly, recently sold homes in the area with similar characteristics). Just because the seller doesn't receive money from the sale of the house doesn't mean that they will automatically accept your offer. Keep in mind that bid wars can occur before the listing agent submits the best and highest offer to the lender. How do you ensure that your offer is accepted above others? There's no winning formula, and it's not always about the highest price.
For example, funding and conditions are also important. An important point to keep in mind is that, in some short selling transactions, junior lien holders may require the purchaser to provide extra money to release the liens. Finally, if you are going to buy a short sale, don't expect them to do any repairs. Lenders generally don't pay to repair anything, such as cracked slabs, broken windows, or leaky roofs.
Although they can pay for termite fumigation when needed, they won't pay for any cosmetic repairs or concessions. So don't make an offer on a short sale that clearly needs work if you don't have the skills to do the job yourself or the money to hire someone to do it right. Have you bought or made an offer on a short sale? How did it work? Share your story in a comment. However, investors should understand how these loans work before making a short buy offer, as this will place them in a much better position to close.
The key factor that differs from a short sale from a normal transaction is that if the valuation made by the buyer's lender ends up being lower than the sale price, resulting in a low valuation, you can probably cause the bank to lower the price. Just because someone advertises a property as a short sale doesn't mean they've been approved for one. In any case, a short sale means that the seller will not receive enough cash from the buyer to pay the full amount owed for the home and will therefore have to reach an agreement with the bank. Buying a short sale where the owner only had one loan will generally save you time and money, but in certain markets, those are few and far between.
The bank or lender generally accepts a short sale to recover a portion of the mortgage loan owed to them. A real estate agent may mistakenly or unethically push a seller to short sell when the seller doesn't necessarily qualify for a short sale. Find out if the agent has received a full short sale package from the seller and ask about the contents of that package. Batterton believes that a scenario like this is one of the only reasons why a typical buyer would want to face a short sale.
If you're a seller, a short sale is likely to hurt your credit, but not as bad as a foreclosure. This process is further complicated if there are multiple liens on the property, which means you'll have to get multiple lenders to accept the short sale. Many factors can influence this schedule, such as the lender's experience in handling short sales, whether the seller has already been approved for a short sale, and the number of lenders involved. .