Saturday, March 01, 2014

Buying That First Home Round Two - Part 3

Now, let's talk about a somewhat controversial topic: short sales, and the #1 thing to know about them:

Banks Don't Really Like Short Sales.

TO understand why, you must understand the difference. A short sale is, to put it simply, an attempt to sell a home that still has money owed on it but doesn't have enough equity to make up the slack.  They happen for a number of reasons: a new job in a different state, a loss of income, disability, etc.  Not all short sales are bad, but rarely are they easy to complete, because they mean that someone will take an expensive hit.

Short sales are almost always priced excellently, because the goal is for the seller to get out of the home quickly.  There are times the borrower is upside down on the home and is trying to get out of it without going into foreclosure and damaging their credit, if they can't continue to make the payments (or simply don't want to). When searching for a home online, the comments may or may not reflect that it's a short sale; if you're working with a REALTOR, they can see the listing type in the MLS and can tell you which are short sales and which aren't.  This is where you want to be careful: some REALTORs will recommend avoiding short sales. Depending on your situation, this may be good or bad advice, and you'll need to decide for yourself whether to follow the advice or ignore it. Remember, the REALTOR is there to serve you!

To help you envision this, consider the following scenario.  You want a move-in ready home and your budget is $300,000.  You do some searches and come up with 50 homes that all look very appealing and well within budget, some for $200,000.  You figure that you're in good shape, and ask a REALTOR for more information on a specific home. He/She tells you that it's a short sale, and that the home still has $100,000 owed on it to one mortgage company, and $50,000 to another mortgage company due to a home equity line of credit.  So while the $200,000 is the asking price, you would effectively be asking both mortgage companies to "forgive" $150,000 worth of debt.

As I'm sure is obvious, banks are not really in the business of letting money just go to waste.

The above is an extreme scenario, but it happens. Sometimes the bank(s) will accept the deal if they don't feel they will get the money otherwise. Often, you can negotiate a lesser amount in compromise; say, if you offer to pay the asking price plus $75,000 of the delta amount if they will forgive the rest. 

You might ask, "why do they approve the short sale then?" The answer is, the bank wants their cake and the ice cream: they don't want to waste money with foreclosure procedures, they don't want a house that goes to disrepair, they don't want to pay the taxes on the home, they don't want to pay the maintenance - but they do want someone who will get the home off the books and hopefully, recoup the majority if not all of the money they would have lost otherwise.  This tussle can last months, with negotiations back and forth with the bank, and you'll often want to make sure your closing date is way out there to give enough time for your team to get the deal finalized. Or, you can bypass the short sale entirely.

So you may ask, "why bother with short sales?" Frankly, they're ready to go with very little work. They frequently come with appliances, utilities, etc. ready to go.  They have been taken care of and have not been sitting unoccupied and dormant. Unlike foreclosures where the owners may have occupied them without paying for extended periods and possibly even mistreated the home, short sales are often not wrought with issues at the point of sale.  When viewing the home, they catch the eye, as the whole point is to appeal to buyers to entice them to take the home.

With the implosion of the home market, a lot of short sales flooded and made  closing on a home that much more difficult.  Paperwork began to pile up, and banks were falling behind with underwriting and loan review; this was in addition to their reluctance to walk away from money they felt they were owed by the owner and/or new buyer.  Buyers looking for amazing deals began to be frustrated with how long simple sales were taking, and it became extremely difficult to buy homes. The end result was a lot of homeowners either going to foreclosure or walking away from their home, which left a lot of homes in disrepair and not move-in ready, dropping their value to shoppers. That in turn affected the values of nearby homes.

In summary, a short sale may or may not make sense for you, depending on (A) how soon you want to close on the home, (B) your budget for a home and (C) how much you really like the home. If it feels perfect for you, don't let the process turn you off; as long as you are informed and prepared for what's to come, and your REALTOR is doing their job, you might do perfectly fine. 

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