Pitfalls of Buying a Short Sale
Wow – that is a great price! What is a “short sale”? Short sales are a large part of the Tampa Bay real estate market. Locally, short sales comprise over one third of all sales, but they often result in massive frustration and canceled transactions. While we have helped many people buy homes at fantastic prices via short sales, the process neither quick nor painless.
Short sales are still owned by the homeowner, but they require a bank’s approval to sell the home for less than the mortgage balance. The average short sale contract takes 4-6 months to close if they are approved without changes. The uncertainty surrounding if or when a contract will be approved takes a toll on many families, as lives are put on hold without much info along the way. The extended closing period may also cause you to miss out on today’s low interest rates. As Certified Distressed Property Experts (CDPEs), and based on our experience in the field, we have compiled a list of issues that could derail a sale:
Seller Modifies Loan
The seller might end up modifying or re-financing their loan, causing the lender to decline the sale.
The White Knight
We have seen family members offer gifts or last minute loans to help loved ones avoid foreclosure.
Running Out of Time
Once a homeowner starts missing payments, the clock is ticking for the foreclosure process. The home may be foreclosed before a short sale is completed. By Florida statute, a foreclosure can happen in 180 days, but in practice the process is taking much longer. Having an short sale offer in to the bank is not guarantee that a foreclosure will be postponed.
Rejection of Hardship
Banks are not in the business of rescuing Tampa area homeowners who are disappointed that their home has declined in value. To qualify for a short sale, a homeowner must demonstrate a true hardship, financial insolvency and a shortfall of income. The short sale is likely to be rejected if the homeowner has other funds, other properties, or money left over at the end of the month.
Rejection of Price
The asking price for a home is set by the owner and the Realtor, not the bank. There is no guarantee that a bank will agree to the asking price, let alone anything less. There is a financial incentive for banks to approve short sales, but they are not giving these homes away – especially since the homeowner is on the hook for the loan(s). If your offer is way below fair market value, chances are it will be rejected and you will have wasted months.
Inaccurate Valuations
A bank might reject the offer based upon an inaccurate valuation. After receiving a short sale contract, banks will want to determine the value of a home. Rather than pay an appraiser $400 for a formal home valuation with true comparable sales, banks hire a outside Realtors to determine market value. Known as a BPO (Broker Price Opinion), these valuations can be inaccurate. They are often completed by inexperienced Realtors for prices ranging from $20 to $50. Many BPOs are done without visiting or entering the home, and the Realtor might not even live in the same market area or have a lockbox key.
Loan Sold Midstream
We have seen loan(s) sold to another lender during the short sale process. As banks often sells large numbers of loans at once, the loan may be sold to a collection company or another bank that might not accept a short sale. We have had this happen with megabanks such as Wells Fargo, SunTrust and others in the midst of consider a short sale.
Conflicting Demands from Multiple Lenders
If the seller has more than one mortgage, then both lenders must agree to the short sale. In order to clear all the liens and complete a sale, the first mortgage holder offers a settlement with the second mortgage holder. The first mortgage holder and the second might disagree on how much the second should receive. We had a case where the policy of the first mortgage holder (who happened to be Fannie Mae) stated that they would only pay a certain amount to the 2nd mortgage holder, and the national policy of the 2nd mortgage holder required a higher amount..so the buyer wasted 5 months of waiting.
The HELOC Payback
If the homeowner has a Home Equity Line of Credit (HELOC), they may be in for a rude surprise. Megabanks are not allowing people to walk away from HELOCs. Many banks are requiring homeowners to sign promissory notes to repay 85% of the HELOC before approving a short sale. Since homeowners are often expecting a “get out of jail free card”, many are not able, prepared or willing to agree to these terms and the sale could be canceled after many months of waiting.
Deficiency Judgment
The bank might agree to the short sale, but the homeowner might not agree to the bank’s terms for the sale. Even if a lender approves a short sale, they might require the sellers to sign a promissory note to repay the deficient amount of the loan. These terms might not be acceptable to a financially desperate homeowner, who could cancel the sale. Rather than accept a deficiency judgment and be obligated to pay back the shortfall, a home owner might decide to take their chances in bankruptcy or foreclosure.
After Bank Approval
The lender reserves the right to cancel the sale at any moment up until closing. We have had short sales approved only to see the loan sold or the sale canceled a few days before closing. Sometimes one department within a bank might not know what another department is doing. As financial pressures mount on banks, we have seen sales canceled at the last moment based upon the financial considerations of the bank (for example: banks may not want to recognize the loss within a certain quarter, or they may not want to write down the value of their holdings while being audited).
There are many other pitfalls to consider. If you are comfortable with the uncertainties of the short sale process, contact a Certified Distressed Property Expert (CDPE) at Team Bohannon today for more info.
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