Should I Buy A Short Sale Home?
In the Baltimore real estate market, it’s no longer unusual to come across an asking price that is clearly too low for the home’s neighborhood. Often, it’s a short sale, which means the seller’s lender is accepting a discounted payoff to release an existing mortgage.
Should you buy a short sale house?
Yes, if….
Yes, if you can resist the temptation to pounce on the low asking price. Yes, if you’re willing to do some additional work. Yes, if you have the patience to wait longer than usual to close the transaction. If you’re willing to work and wait, you can get a great deal by buying a short sale home.
First, ask your Realtor to call the listing agent to find out if home is a short sale. If it is, you should be aware that any offer you make must be accepted by the lender, not just the seller. You should also be aware that the seller need not be in default (i.e., to have stopped making mortgage payments). The lender may consider a short sale if the seller is current but the home’s value has fallen. The seller may owe more than the home is worth. So a discounted price might bring the price into line with market value, not below it.
With that in mind, the next step is research. Ask your agent to find out who is in title, whether a foreclosure notice has been filed, and how much is owed to the lender(s). This will help you to determine how much to offer.
Are there two loans? If so, you could have a problem. The first mortgage lender’s position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.
You’ll need to work with a real estate agent who has handled short sales before. If neither the listing agent nor your own agent has short sale experience, find one who does. An agent experienced in short sales will help to expedite your transaction and protect your interests.
Before a lender will agree to a short sale, they usually have to be convinced that the seller has no equity and is unable to repay the difference between your sales price and the balance of the existing loan(s). You, your agent and the listing agent need to make sure the seller provides the lender a hardship letter that details how the seller got into this financial bind and makes a plea to the lender to accept less than full payment. If the basis for the seller’s troubles is dishonesty or illegal behavior, the lender is very unlikely to agree to a short sale.
After the seller has accepted your offer, submit the offer and supporting documentation to the lender for approval. You do not have a deal until the lender accepts. Send the lender a copy of your earnest money deposit and a letter from your lender saying you’re preapproved for your loan. Your agent should send a list of comparable sales that support the price you are offering to pay.
Make your offer contingent upon the lender’s acceptance. Give the lender plenty of time to make a decision, but do include a specific deadline after which you will be free to cancel. Some lenders submit short sales to committee. Others can make a decision within three months. Get a name and phone number for the appropriate contact at the lender. Don’t send an offer blindly to a department.
The lender will probably negotiate the commission directly with the listing broker, who will then share the commission with your agent. If you have signed a buyer’s broker agreement with your agent, ask the agent to waive the difference due. Otherwise, you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent.
Remember, the lender is almost certainly losing money on the deal. So don’t expect the lender to pay for items that a seller normally would pay for, such as a home protection plan, buyer credits, and inspections for termites or other pests. You will be purchasing the property “as is,” which means no repairs. So it’s critical that you obtain a home inspection and pay for other types of inspections that may be needed. Do not waive your right to obtain these inspections, and make your offer contingent on approving them.