Top 5 Short Sale Pitfalls

By Ryan Dosen

Everybody wants a deal. In the wake of the recent recession, we’ve seen a shift toward a Groupon way of life. The economic downturn has forced most of us to get more out of our dollars.  We want everything for cents on the dollar. Stock shares in Dollar Tree and Dollar General has almost tripled in the last five years. But, those of us that have been through a dollar store also know a couple of things: (1) just because it’s in a dollar store, it doesn’t mean it’s a good deal, and (2) oftentimes, we could have gotten a better product for around the same price elsewhere.

The Groupon culture has been alive and kicking for years in the real estate market. At the peak of the crash, savvy investors pooled billions of dollars and scooped up short sale (i.e. when a bank agrees to take a loss on the sale of a home, accepting less than the outstanding mortgage balance at closing) and foreclosure properties for cents on the dollar. Everyone wanted in on the action. Unfortunately, most of us were hit hard by the collapse and we didn’t have money to invest. Now that the economy is improving, many buyers are seeing this as their opportunity to catch the tail end of the Distressed Home Bonanza.

I’m not here to tell you that the party’s over, but the days of parsing through a laundry list of homes that you can pick up for fifty cents on the dollar are long past us. While it is still possible to get a “deal” on a short sale or foreclosure, those “deals” will not be as dramatic as many of you have imagined, and many of those “deals” will present unexpected complications of which you may not be aware. So, let’s take a look at a few things you should know about short sales…

1. Homes Generally Sell for Market Value

Just like you have survived the crash, the bank that currently holds the mortgage on your short sale prospect has also survived the crash. In the immediate wake of the storm, banks were forced to dump properties for whatever they could get. Banks are still liquidating these homes, but they are doing it in a more controlled manner and they are no longer giving the properties away.

Lenders require comparative market analyses (CMAs) on all short sales to determine if they are getting market value for a home. The other side of the coin is that you are competing with other buyers for the short sale—buyers that also know the value of the home and that will be fighting with you for the right to purchase it.

In short, the short sale will usually sell for slightly under market value, but it will be due in some part to the issues and uncertainty presented by the factors we will discuss below.

2. Short Sales are Typically Sold “As Is”

When you are buying a home, your lender will require a home inspection. Important items that could come up during an inspection, such as a termite infestation, or the need for a new roof or a new HVAC system, would often be grounds for negotiating a lower price or requiring the owner to resolve the issues before closing. However, short sales are ordinarily sold “as is.” When you are buying “as is,” you are buying the home as it is. Warts and all.

Be mindful that distressed homes often are not in great condition. Their owners were probably behind on their mortgage or were struggling with their payments. Someone that’s been struggling with paying their mortgage may not have been paying for proper upkeep of their home. If you haven’t seen the Tom Hanks movie “The Money Pit,” rent it. It’s funny. However, you probably don’t want to live it.

 

3. Short Sales Can Take a Long Time to Close

The processing of a short sale could take weeks, months…or many months. We recently had a short sale transaction fall through. After being under contract for almost six months, the buyer got fed up with the process, cancelled the contract, and bought another home. Once you make an offer on a short sale, you are then on the bank’s time line—a time line, the details of which even they do not know. Purgatory. You will wait until they are ready. If you are working with any kind of narrow window for acquiring a home, be careful not to put all your eggs into a short sale’s basket.

 

4. Banks Can Change the Terms of the Short Sale

With a short sale, as mentioned above, you will make an offer that you hope and believe the bank will accept (based on CMAs and such), and you will wait. During all this waiting, your offer is not a contract. The bank will only sign and make it a contract at the very end of the process.

Things change over time. If market conditions or other things change during your time in purgatory, the lender may try to change or renegotiate the contract terms at the last minute.

 

5. Short Sale Sellers May Try to Slow Down or Sabotage the Transaction

Picture this: You overextended yourself. You can’t afford your home. Your loan is through one of the big banks. You’ve done your part and submitted your evidence of hardship to the big bank and you’ve been approved for a short sale. You and hundreds of thousands of others (RealtyTrac.com reports that more than 256,000 short sales occurred in 2013).

It took them a while, but the bank hired an agent to list your home. You’ve now firmly placed yourself in the bank’s “system” and in the middle of all the bureaucracy that comes included therewith. In this “system,” you will wait until the bank finds someone that can navigate their bureaucracy and manage somehow to buy your home. On the surface, this doesn’t sound that great. However, every thorn has its rose. Or is it the other way around? Well, in the world of short sales, banks are losing money, contracts are signed at the end of deals, and backwards is forwards.

Planted firmly in the bank’s “system,” you may now be living rent- and payment-free in your own home until it sells.

You love your home and you don’t want to leave (especially if you’re living there for free). You can’t obstruct the short sale process, but let’s just say you’re not going to feel guilty if it takes you a little longer than it should to get the bank everything else they will need to complete the sale (taking) of your home. So, you take your sweet time, which slows things down for the bank, which slows the transaction, and maybe if you’re lucky, ends up resulting in the deal falling apart or the buyer walking away—allowing us to do this dance all over again, and allowing you more free living in your home.

Some shorts sellers are legitimately trying to get out from under a bad loan and move forward with their lives as quickly as possible. Other short sellers have been living in their homes for free for years. These “others” may not be all that helpful when you come to take their home away.

 

Empower Yourself with the Right People and Information

If you go the short sale route, you may indeed get a good deal and may not have to wait that long to get it. You may also, due to extra needed repairs and costs, get a “good deal” that ends up being no better than a normal listing. You also could simply be signing up for months of frustration and a failed transaction. Before jumping at a short sale, make sure that you are represented by an experienced real estate team so that you are well-informed and well-equipped to deal with what will likely be a challenging (and possibly not even worthwhile) endeavor.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Follow Ryan on Google+. For buyer or seller representation, or for more perspective on the local and national real estate market, please email rdosen@megillhomes.com and visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.