Buying a home where the seller owes more than what the home is worth is known as a short sale and have become a new norm in the current market.
For many people, buying a home is a once in a lifetime experience. As with anything that is new or unfamiliar, the home buying process can be stressful, but the written contract spells out the entire transaction, in part, to keep stressful situations to a minimum. The price of the house, the closing or settlement date, and the responsibilities of each of the parties are just some of the terms contained in the contract.
Imagine how you would feel if your real estate agent informed you midway through the transaction of a delay of the settlement date by three to six months or of an increase of the price, or that the repairs the seller agreed to do on the house would not be done.
You would probably be angry, stressed, confused, and left to wonder why these things were happening. If you are the purchaser of a short sale, chances are each of these things, and more, will occur before the transaction ends, regardless of the terms of the contract.
With a real estate market loaded with homes for sale where the selling price will not be sufficient to repay the mortgage debt in full, these “short sale” transactions have become a fact of everyday life for real estate agents throughout the country. Experienced agents know that buyers can get a house at a fair price in a short sale, provided they have exercised a little caution.
Make the Purchase Offer Subject to a Home Inspection
A short sale is a real estate transaction in which the seller asks the lender holding the mortgage to accept less than the full amount owed. This occurs when the market value of the home is less than the mortgage debt. The money that will be available from the sale to pay the lender is calculated by deducting the seller’s closing expenses from the sale price.
Banks are very strict about repairs. Most will not permit deduction of the cost of repairs. If the seller cannot pay for it, then the buyer must take the home in its current condition.
A good home inspector will give the buyer an estimate of the cost of repairs, and will prioritize them. This allows the buyer to know what must be done immediately, and how much it will cost.
Making an offer to purchase subject to the home inspection gives the buyer the option to withdraw from the deal if the repair estimate is too high.
Insist that the Home be Vacant at Closing or Settlement
Buyers of short sales mistakenly believe that the bank holding the mortgage on the property is the seller. This is because people associate short sales with sellers who are delinquent in making their mortgage payments, and may even be in foreclosure. Until title transfers to the bank, the seller is still the owner with the right to sell the property. Just look at the contract of sale or sales agreement. Do you see a bank listed as the seller?
The seller’s bank is involved in the transaction only to the extent of having to give its written consent to accepting less than the full amount needed to pay off the mortgage. If there is more than one mortgage loan, all of the banks must consent to the sale before the transfer of title to the buyer.
Buyers who believe they are purchasing from a bank may not think to insist on language in the contract or sales agreement assuring them that the seller will be out of the house on the day of closing or settlement. The contract or sales agreement must contain language that the house will be delivered in vacant condition at the closing.
The buyer must verify at the final walk through the property that the seller has moved. If the seller is still there, do not agree to close until the seller is gone. Putting money in escrow is not an option because the seller is not getting any money from the transaction. Remember, it is a short sale, so all funds are going to the banks.
Be Prepared to Increase the Offer
It is common for the seller’s bank to reject the offer made by the seller. This could be due to the bank disallowing some of the seller’s expenses, such as legal fees, real estate commissions, or other closing expenses.
Buyers can keep the transaction alive by increasing their purchase offer, but this requires some caution. Ask whoever is negotiating the short sale on behalf of the seller to obtain written confirmation of the amount the seller’s bank is willing to accept. This is not possible at the beginning of the transaction, but is possible and essential once the bank has rejected the offer.
Be Flexible About When You Must Close
A buyer who lives in a rented apartment with a close expiring in 30 days should not be purchasing, or even looking at, a short sale. Short sales take time. Four to six months is not an unusual length of time to wait for a bank to approve a short sale.
Be Ready to Close
The mortgage commitment the buyer gets must be extended after 30 to 60 days from when it is issued. It is the buyer’s responsibility to keep the commitment current and ready to close. Seller’s banks have been known to approve short sales on condition that the bank gets its money in 72 hours. A week to ten days is more common, but even that is not a lot of time.
In some areas of the country, the majority of homes on the market are short sales. They have become an unpleasant fact in the real estate industry. For a knowledgeable buyer, a short sale can offer an opportunity to get the right house at an affordable price.